Investors worry about bear market rally

The S&P 500 recently enjoyed its biggest weekly rally since November 2020 but no one’s celebrating. Instead, everyone’s asking: is this another bear market rally?

It’s a fair question. There have been many rapid rebounds this year, most especially in mid-March, when the S&P 500 soared 11.5 per cent in a fortnight. Each rally soon petered out. The latest rally will be similarly short-lived, says Morgan Stanley, which estimates the S&P 500 will hit 3,400 — about 17 per cent below last week’s levels – by August.

No one has a crystal ball, but bearish strategists rightly note that stocks were poised to pop. The S&P 500 was trading at oversold extremes following seven consecutive weekly declines – a losing streak seen on only three other occasions in history.

Stocks rarely go down in a straight line, so a rebound isn’t surprising. Such relief rallies are common in bear markets. Ritholtz Wealth Management’s Nick Maggiuli notes stocks rallied more than 10 per cent on three separate occasions during the 1974 market crash; on six occasions during the 2000-2002 bear market; and on three occasions during the global financial crisis.

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However, it’s also true that strength usually begets strength. LPL Research’s Ryan Detrick looked for other instances where stocks gained more than 6 per cent in a week. Six and 12 months later, stocks averaged gains of 12.5 and 21.7 per cent, respectively. SentimenTrader’s Jason Goepfert agrees multi-day reversals like we’ve seen recently have “consistently preceded further gains”.

Other breadth indicators are showing “historic surges”, he adds, while fewer stocks are in trouble – a welcome change. So is this a bear market rally? Maybe, maybe not.

Sorry, but no one knows for sure. Investing can be a tricky business. Seeing your portfolio lose value can be psychologically difficult, but so is missing the bottom and watching indices take off without you. That’s why it’s important to heed the old cliché that good investing is not about timing the market, it’s about time in the market.