Fake bear-market rallies

When a rally is not a rally

The current downturn is the tenth worst market drop since the Great Depression:

Since this year hasn’t been so fun for investors, most people want this downturn to be over so we can get back to seeing our investments grow.

Recently, the market has had a nice bounce off the bottom. But, it’s hard to trust a rally during a long downturn. How do we know if the bottom is already in? Are we going to lose more money by the market eventually dropping even lower? We don’t want to get faked out.

Historically, downturns have had nice fake-out rallies on the way from their peak to trough:

Generally, the bigger the downturn, the bigger the rally on the way to the bottom:

What stinks about all ten of these rallies is that the market had yet to bottom! So, investors had to deal with not only the pain of the market going back down to a lower low but also the pain of first seeing their investments go up!

However, there is a positive side to this. Since there is a pretty notable relationship between downturn magnitude and pre-bottom rally size, we can get some comfort that a bottom is in when we see a rally that is “big enough.”

Right now, we are on the cusp of a big enough advance that the odds of a new market bottom become much smaller. That isn’t to say that it’s impossible nor is it to say that there won’t be some choppiness or a long time for recovery.

But, it’s perhaps a little bit of peace of mind as one of the many triangulation points we consider when determining whether or not it is time to get back into the game.