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What Is a Bear Market Rally?

Sebencapital

Published
19/01/24
What Is a Bear Market Rally?

DEFINITION:

A bear market rally happens when stock prices go up temporarily during a period when the overall market is doing poorly. Some people call it a sucker's rally, bull trap, or dead cat bounce.

Key Takeaways

  • A bear market rally happens when prices go up in a market that's generally going down. People sometimes call it a sucker's rally, bull trap, or dead cat bounce. It can fool investors into buying stocks right before they drop again.
  • It's tough to recognize this kind of rally until it's already happened, and it can happen multiple times in a long-lasting bear market.
  • Day traders might profit by betting against stocks, but regular investors should stick to their investment plan and not try to time the market.
  • When there's a bear market rally, it suggests that the market decline will persist, and prices will likely drop more before a true recovery begins.

Definition and Examples of a Bear Market Rally

Bear market rallies come with nicknames that highlight the risk for investors who think the market has hit the lowest point when, in reality, the gains are temporary before prices fall again. It's often called a "sucker's rally" or a "bull trap" because optimistic investors who join the rally may face sudden price declines. Another term used is "a dead cat bounce," based on the idea that anything dropping quickly will briefly bounce back when it reaches the bottom.

  • Alternate names: A "sucker's rally," "bull trap," and "dead cat bounce" are terms that warn investors about temporary increases in the market that may trick them into thinking things are getting better, but in reality, prices might fall again.

In 2020, we saw a bear market rally. The S&P 500 Index fell over 20% from Feb. 20 to March 12, officially marking a bear market as it closed at 2,480.64. The following day, the index went up by 9%. However, investors who jumped back in got tricked because the index dropped to 2,237.40 just 10 days later, erasing the gains as the market kept going down.

S&P 500

What Is a Bear Market Rally?
Dec. 31, 2019, through close on Dec. 31, 2020.
Source: S&P 500
Chart: The Balance Get the data Add this chart to your site

Note

Based on information from Bloomberg, there have been 14 times since 1927 when the S&P 500 experienced a bear market. In these instances, there were 20 rallies during the bear markets, where the index went up by 15% or more. These rallies lasted for various periods, ranging from just a couple of days to several months.

In February 2020, the Dow Jones Industrial Average reached a peak, but it didn't stay there for long. When the coronavirus pandemic was declared a national emergency, the Dow experienced its three biggest single-day point losses in U.S. history. These drops in March 2020 marked the official end of an 11-year bull market.

  • March 16: Down 2,997.1 points
  • March 12: Down 2,352.6 points
  • March 9: Down 2013.76 points

Following the big drop on March 9, the Dow went up nearly 5% on March 10. However, by March 11, it closed down at 23,553.22—a 20.3% fall from the highest point on Feb. 12, which was 29,551.42. On March 23, the Dow hit its lowest point of the year, reaching 18,591.93. Fortunately, by the end of 2020, the Dow was making new record highs.

Dow Jones Industrial Average

Dow Jones Industrial Average
Dec. 31, 2019, through close on Dec. 24, 2020.
Source: S&P Dow Jones Indices
Chart: The Balance Get the data Add this chart to your site

What a Bear Market Rally Means for Individual Investors

A bear market happens when stock prices drop by 20% or more for at least two months. In a bear market, prices might go up a bit before going down again. This up-and-down movement is called a bear market rally. It's like a temporary gain followed by more losses until the market hits its lowest point. Just like any other market shift, a bear market rally can be a chance to either make money or lose it.

Note

Investors who are in it for the long term and have diverse investments should pay no attention to signs of a bear market rally. It's best to stick with the strategies they've already set in place.

Take a Short Position

A bear market rally gives day traders an opportunity to make money by betting against stocks. This is a tricky strategy and might not be suitable for beginners.

Try Dollar-Cost Averaging

For long-term investors, especially those regularly adding money to their accounts like in retirement savings, a bear market rally is good news. It means stock prices are expected to stay low for some time. People using a strategy called dollar-cost averaging can benefit from this. They get to buy more shares when prices are cheaper until the market hits its lowest point. This helps bring down the overall average price of the stocks they own over time.

Avoid Emotional Investing

If you're rushing to invest in rising stock market prices because you're afraid of missing out, that's emotional investing, and it usually leads to losses. Investors who have solid plans and diverse investments should steer clear of anything that seems like the beginning of a tricky rally. It's better to stick to their long-term strategies and avoid potential losses.

It Likely Won’t Last Forever

A bear market rally suggests that the market is going through its natural cycle. It can also mean that some frustrated investors, who have been waiting for a rally, might give up and sell, causing prices to move toward the eventual low point before recovery. In history, bear markets have often bounced back above the levels seen during their rallies, as happened with the Dow in 2020. Despite a significant drop earlier in the year, by December, the Dow was hitting new record highs.

Please note that The Balance doesn't offer tax, investment, or financial services advice. The information is provided without considering specific investor circumstances and may not be suitable for everyone. Investing always involves risk, including the potential loss of the initial investment.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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