Bear Market Rally

Posted By Darren Winters on May 17, 2020

Bear Market Rally

Is the bear market rally over?

The S&P is trading a significant 30% above its March 23 lows and there are varying views that this is not a bear market rally but the beginning of a bull market.

It is worth noting that bear market rallies are not uncommon

History is full of instances of bear rallies that eventually surrender to yet another, lower bottom.

For example, the 1929 stock market crash is an example of an impressive 47% bear market rally over four months immediately after the bear bottom of the 1929 stock market crash.

After peaking, the market then reversed its trajectory in April 1930 and then began to go into a protracted tailspin of decline for the next two years until it hit its ultimate bottom in June of 1932 during the Great Depression, wiping out 83% of its value at the peak in April 1930. 

A tale of false market bottoms and the folly of bear market rallies, the 1929 stock market crash.

A secular bear market is nutritious, it feeds on new money by staging short term spectacular mini bull markets before it continues its trajectory downwards

Also keep in mind that bear market rallies are typically following dire fundamentals, and a stock market crash, which often causes monetary policymakers to inject liquidity into stocks.

Last month’s April bear market rally was probably the result of trillions of dollars of the Fed’s quantitative easing program

Bear market rally

So April’s spectacular 30% rally from the bottom coincided with the Fed’s balance sheet hitting a new record of $6.7 trillion in the last week.

In other words, April’s stock rally was most likely Fed-induced. Meanwhile, smart money capital flows has not bought into the stock market rally.

Warren Buffett has decided not to put his $122 billion cash pile into stocks in April, believing that there are still no real bargains.

Moreover, Norway’s $950 billion sovereign wealth fund, the world’s biggest, is about to make history as it prepares to liquidate assets to cover government withdrawals. Put another way the world’s largest wealth fund would rather liquidate then keep cash in the market.

A string of the world’s top investors from Jeff Gundlach, Warren Buffett to Paul Tudor Jones all believes that these markets are heading for new lows, which suggests that the bear market rally is over. 

The fundamentals have never been so dire, policymakers are exhausted following a decade of unprecedented monetary easing and public funds are stretched so all this suggests that the bear market rally could be over. 

If so, standby for the next leg down.

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