What Is a Bear Market Rally?
A bear Market Rally refers to a sharp, short-term price increase in a stock or market amid a longer-term bear market period. Investors can sometimes misinterpret bear market rallies as markers of the end of a bear market, and so they must be treated with caution.
- Bear market rallies are periods during a bear market when assets quickly appreciate in value in the short term, over days and weeks, before heading back down to new lows.
- Bear market rallies are not a sign that the bear market is over or that asset prices have stabilized.
- Though long-term investors should not try to trade bear rallies or buy stocks when they are gaining in value, traders may be able to make money selling assets as they increase in value and buying them as they continue their downward march.
Understanding a Bear Market Rally
A bear market rally describes a period inside of a bear market in which prices of stocks temporarily increase during, sometimes quite sharply, before returning to new lows. This rise in prices is typically a short-lived increase, sometimes lasting anywhere from days to months, amidst an overall long-term downward trend in the market.
A bear market is typically indicated by a 20 percent drop in the market from recent highs and tends to occur when the market is overvalued. During a bear market, investor confidence trends low, and traders watch eagerly for signs of upward movement in the market.
While speculating on bear market rallies tends to be a high-risk investment strategy, it can be attractive to investors looking to sell assets they may have bought at the bottom of the bear market as the rally peaks. This strategy can also be attractive to stockholders looking to mitigate long-term losses and to liquidate assets.
Identifying a Bear Market Rally
Identifying a bear market rally can be challenging, even for experienced traders. In many cases, a bear market rally can last for weeks or months amidst a longer-term downward trend.
Although there are no specific benchmarks for classifying a bear market rally, the term is typically used to describe an increase of 5 percent or more during a bear market, followed by a subsequent, continued downward drop. Notably, the Dow Jones experienced a three-month bear market rally following the Stock Market Crash of 1929, although the bear market continued to decline until bottoming out in 1932.
Longitudinal research has shown that since the beginning of the 20th century, every bear market has spawned at least one rally of 5 percent or more before the market corrects. Two-thirds of the 21 bear markets that occurred between 1901 and 2015 experienced rallies of 10 percent or more. Analysis of the 30-month bear market that began in 2000 and accompanied the Dotcom Crash shows nine rallies of 5 percent or more, four of which exceeded a 10 percent gain.
Because bear markets last for long periods of time, they can exact an emotional drain on investors hoping for a market turnaround. Market advisors warn against emotional responses to market volatility, as investors may panic and make judgment errors regarding their holdings.