People panic before the close of a market in fear that when it reopens it will crash further. This standard knowledge and reflects the anticipation factor so the big rally reflected the fact that the markets moved down too much too fast but the Dow held the 21600 level. Holding this level allowed the countertrend rally to occur. However, this is a BOUNCE, most likely, into next week and we will see if it retests the lows again.
Did today’s rally give an “all clear” signal to buy stocks? As numerous traders opined today, it is common knowledge on Wall Street that furious rallies are common during market drops and bear markets. In fact, much more common then than during a regular bull market.
“This is not the kind of price action you see in normal bull markets,” said Robert Baird equity sales trader Michael Antonelli. “This is just a face ripping short cover rally. I am 100 percent not saying we are in a situation like 2008 now, but look at October 10, 2008 to October 13, 2008: the market rose nearly 12 percent in one day. October 27 to October 28, 2008, it rose 11 percent.”
“Bear markets always serve up some very nasty rallies,” said Doug Ramsey, chief investment officer of Leuthold Weeden Capital Management, which manages about $1.2 billion. “There’s a saying that bear market rallies look better than the real thing so I’d expect at some point here a 3 to 4% up day. It’s not unusual at all to see that in a bear market.”
“This type of volatility primarily occurs in bear markets” said Fred Hickey, editor of the High-Tech strategist. “The stock market was short-term oversold & due for a sharp rally. But a 1,086 point rally, while fun for the bulls, will scare some investors away. They’ll realize the current market is too dangerous for more risk-adverse investors.”
In fact, according to Bloomberg data, in eight previous bear markets the S&P 500 experienced rallies of greater than 2.5% more than 120 times as the benchmark plunged from peak to trough. From the collapse of Lehman to the financial crisis bottom in March 2009, the S&P 500 rallied more than 4 percent on 13 different occasions.
The best visual confirmation that today’s rally was nothing but a “face-ripping” short cover rally in the context of a bear market, comes from Matt Thomson who today tweeted the following chart showing historic market gains of more than 4% since 2000. Not surprisingly, the biggest cluster took place during the financial crisis in late 2008 and early 2009, before the market eventually bottomed.
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