Relief Rally Definition & Conditions That Trigger It

What Is a Relief Rally?

A relief rally is a respite from a broader market sell-off that results in temporarily higher securities prices. Relief rallies often occur when anticipated negative news winds up being positive or less severe than expected. A relief rally is one type of bear market rally.

Market participants price in many different types of events, such as the release of a company's quarterly earnings report, election results, interest rate changes, and new industry regulations. Any of these events can trigger a relief rally when the news is not as bad as expected. Relief rallies happen in many different asset classes such as stocks, bonds, and commodities.

Key Takeaways

  • A relief rally is characterized by a rise in securities prices that acts as temporary relief from broader selling pressure.
  • Relief rallies generally are seen during a secular bear market.
  • One can be triggered by slightly good news, with short-sellers helping push the stock higher by covering their positions.

Understanding 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 analyst expectations for many quarters.

Sometimes, even a lower-than-expected loss can ignite a relief rally, or they might be triggered by 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.

Because bear markets last for long periods of time, they can exact an emotional drain on investors hoping for a market turnaround—hence the "relief" when signs of a bounce appear. Market advisors warn against emotional responses to market volatility, as investors may panic and make judgment errors regarding their holdings.

Identifying a relief rally can be challenging, even for experienced traders. In many cases, such a rally can last for weeks or even months before the continuation of a longer-term downward trend.

Special Considerations

A relief rally does not necessarily spell the end of a secular decline, however. Both the aftermath of the dotcom bubble and the 2007–2008 financial crisis saw several relief rallies for stocks, only to see renewed fears push market prices lower again.

Sharp relief rallies that occur in otherwise bearish markets are sometimes called a dead cat bounce or sucker's rally. This type of rally may fool some into thinking there is a reversal in the trend, only to find the bear market continuing soon after.