What Is a Relief Rally?
A relief rally is a respite from a market sell-off that results in higher securities prices. Relief rallies often occur when anticipated negative news winds up being positive or less severe than expected.
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.
- A relief rally is characterized by a rise in securities prices that acts as temporary relief from selling pressure.
- They generally happen during a secular decline.
- One can be triggered by slightly good news, with short sellers helping push the stock higher by covering their positions.
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 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.
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.
Relief rallies in bearish markets are sometimes called a dead cat bounce. This type of relief rally happens when there's a temporary rally during a bear market or lengthy decline, but then the downtrend continues later.
Real World Example of a Relief Rally
Here is one example of a relief rally. The S&P 500 Index lost one third of its value in March 2020 amid concerns about the global COVID-19 pandemic. However, stocks later climbed and set new all-time highs in a relief rally, as the economic impact of lockdown measures to contain the virus were less severe than expected, thanks to trillions of dollars in government stimulus.
Outside of equity markets, crude oil saw a major downturn in early 2020 amid fears stay-at-home orders would result in less demand for oil. Prices sank to below $20 per barrel before recovering their pre-pandemic levels in a relief rally.