What is a Sucker Rally
Sucker Rally describes an inaccurate indication that a price is heading upward despite a longer downward trend, often during a bear market.
BREAKING DOWN Sucker Rally
Sucker Rally is a slang term referring to the temporary rise in either a specific stock or the market as a whole, which continues just long enough to attract investments by naive or unsuspecting buyers, or suckers. The stock or the market subsequently falls. This phenomenon is also sometimes known as a dead cat bounce, a bull trap or a bear market rally.
Sucker rallies frequently occur when the price of an stock noticeably rises in spite of the fact that the fundamental aspects of the stock have not changed. In most cases, these fundamentally unsupported price increases result in a large drop, usually continuing an overall downward trend. Sucker rallies frequently occur amidst bear markets, and are usually identified in hindsight.
Identifying a Sucker Rally
Identifying a sucker rally can be challenging, even for experienced traders. Especially during a period of downward-trending market volatility, such as a bear market, sucker rallies appear and disappear without warning.
A bear market is typically indicated by a 20 percent drop in the market, 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. Inexperienced or panicking investors may be tempted by market upticks, making these investors especially vulnerable to the whims of a sucker rally.
Rallies are common occurrences during bear markets. Notably, the Dow Jones experienced a three-month rally following the Stock Market Crash of 1929, although the overall bear market continued on a greater 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.