We’re in a bull market, by the 20%-up rule of thumb, but there’s always a chance that a bear is really in charge.
Photo: Ben Birchall/Zuma PressRecently, some investors have been talking about a bear-market rally. But what does it mean and are we experiencing one currently?
Most people define a bear market as a drop of at least 20% in the stock market from the latest high (while a 20% recovery from its low puts an index back in a bull market). Between Feb. 19 and March 22, the S&P 500 index fell by more than 30%, putting the drop well into bear-market territory.
Then the market started rallying. Now, investors are wondering whether the rally we’ve seen since then—including a nearly 40% gain in the S&P 500 from its lows in March, snapping it solidly back into bull-market status—will be sustained or be short-lived. If it is just an upward blip within a longer-term period of falling prices, it will be remembered by many as a bear-market rally.
Such rallies tend to be fast and robust, albeit short-lived. For instance, the bear market during the 2007-09 recession included a rapid rebound from early March 2008 to mid-May 2008. Then the downtrend continued through March 2009.
JC Parets, founder of New York-based technical-analysis company All Star Charts, at first believed the current market was experiencing a bear-market rally. But over the past few weeks, he has changed his mind. He says the sectors, or industries, leading the market keep changing. “There is evidence of sector rotation,” he says. “Rotation between sectors is the lifeblood of a bull market.”
If this is indeed a bear-market rally, no one will know it is until after the fact.
Photo: Martin TognolaNot everyone agrees.
“There is a good case to made that this is a bear-market rally,” says Anupam Damani, a portfolio manager at Nuveen in New York. She says the rally since March was the result of extra liquidity provided by the Federal Reserve, and that she sees a disconnect between the fundamental weakness in the economy and the strength of the stock market. “Investors are having a hard time buying into this rally, when you try to marry the rally with the fundamental picture,” she says.
As is always the case, bear markets and bear-market rallies are easier to identify with hindsight.
“We only know if it is a bear-market rally when we look back,” says Ms. Damani. “We can’t know when we are in it.”
Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.
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