Understanding the Bear Market Rally

 



In the world of investing, the term “bear market rally” often surfaces during periods of extended economic downturn. But what exactly does it mean, and where did this term originate?

Defining a Bear Market Rally

A bear market rally refers to a sharp, short-term rebound in the price or prices of a stock or stocks during a longer-term decline, known as a bear market. Essentially, it’s a rally within the confines of a bear market. These rallies can be deceptive, giving traders a false sense of recovery before the market resumes its move to the downside.

The Origin of the Term

The term “bear market rally” has its roots in the broader concept of bear markets, which are characterized by a decline of 20% or more in stock prices from recent highs. The “bear” metaphor is believed to come from the way a bear attacks its prey, swiping its paws downward. This imagery aptly describes the downward movement of stock prices during such periods.

Bear market rallies are sometimes referred to as “dead cat bounces” or “sucker rallies,” highlighting their often misleading nature. Historically, these rallies have been observed in nearly every bear market, with some of the deepest bear markets producing the sharpest, most significant and prolonged rallies.

Characteristics of a Bear Market Rally

Identifying a bear market rally can be challenging. Typically, these rallies involve a recovery of 5% to 10% in stock prices, but they do not signify the end of the bear market. Instead, they are temporary upticks that can last from a few days to several months.

Traders should be cautious during these periods, as the primary bearish trend often reasserts itself, leading to new lows. Understanding and accepting the broader economic indicators and market fundamentals is crucial to avoid being caught in these traps.

Summary

In sum, a bear market rally is a temporary recovery in stock prices during a prolonged market decline. It’s a rally within the confines of a bear market, often providing a false sense of hope to traders who fall prey to it before the stock continues its downward trajectory. By recognizing the characteristics and historical context of bear market rallies, traders can better navigate these turbulent times and make more informed decisions.

An Example

The Boeing Company [BA] provides a recent example.

Beginning in November of this year [2024] Boeing [daily chart] has rallied strongly [more than $40] off its lows.  


However, one look at the longer term [monthly chart] makes it clear that this rally is within the confines of a multi-year Bear Market in the stock.


This is true even though the stock appears to have stalled at long-term support in $100 to $160 area. I would say that the easy money and low risk [if any] has been made already and the stock is likely to turn lower at any time.

For what it's worth, I think the long-term chart speaketh the truth... still.  I think BA is going lower before it's all said and done as large holders give up on the stock.  If it goes so far as to break below the 2020 low at $89, look for price to accelerate to the down side.

As always, I hope it helps and questions welcome.

E