What Is a Relief Rally?
A relief rally is a respite from market selling pressure that results in an increase in securities prices. Sometimes it happens when expected negative news ends up being positive, or it’s less severe than expected.
Market participants price in many different types of events, in addition to corporate earnings. Examples include election results, policy interest rate changes by the U.S Federal Reserve and new industry regulations. Any of these events can trigger a relief rally when the news is not so bad, relative to widespread negative expectations.
Relief rallies happen in many different asset classes such as bonds and commodities, not just stocks.
The Basics of a Relief Rally
A relief rally often happens amid a secular decline in the market or persistent selling pressure that lasts for multiple days. Relief rallies happen for individual stocks, as well. Slightly better than expected financial results sometimes ignite relief rallies for beaten-down stocks with a long history of missing analysts’ expectations for many quarters.
Sometimes, even a lower-than-expected loss can ignite a relief rally in these situations or a more-positive tone on a company conference call with analysts. Part of the reason is that slightly good news sometimes causes short sellers to buy stock to cover their positions, which can trigger a short covering. This is done as short sellers look to avoid further losses as prices rise.
A relief rally does not necessarily spell the end of a secular decline, however. Both the dot-com crash and the 2007–2009 financial crisis saw several relief rallies for stocks, only to see renewed fears push market prices lower again. Relief rallies in these very bearish markets are sometimes called a dead-cat bounce. This type of relief rally happens when there's a temporary recovery from a bear market or lengthy decline, but then the downtrend continues later.
An Example of a Relief Rally
As a relief rally example, stocks tumbled in August 2015, amid concerns about an economic slowdown in China, at the time the world’s second-largest economy. A devaluation of China’s currency also weighed on global markets, as many feared the slowdown could spread to the U.S.
But better than expected U.S. gross domestic product later that month and moves by the Chinese government to aid the falling stock market resulted in a strong two-day relief rally in which the S&P 500 rose more than 6%.
More recently, stock market volatility increased in February 2018, amid rising geopolitical tension between the U.S. and North Korea, as well as uncertainty regarding U.S. trade policy. Markets also grew wary about rising bond yields with 10-year Treasury yields briefly reaching 3 percent for the first time in years. But roughly midway through the month, stocks gained broadly for about a week straight, a relief rally led by a market bounce off a long-term moving average that lifted sentiment, as well as better-than-expected earnings from several large-cap companies.
Outside of equity markets, crude oil saw a major downturn in 2015 and most of 2016, led by increasing global supply amid moderate global demand. However, OPEC agreed to cuts in production in November 2016, igniting a relief rally in crude prices.