Don’t Be Fooled: Stock Rallies Are Pretty Typical Of Bear Markets

Don’t Be Fooled: Stock Rallies Are Pretty Typical Of Bear Markets
Stéphane Renevier, CFA

4 months ago2 mins

Note: This article was initially published on August 2, 2022. We're sharing it in today's news feed, more than a year later, as it's once again worth keeping in mind.It’s very easy to forget what it’s actually like to be in the middle of a bear market – to convince yourself that stocks are in a constant downtrend until they’re not. So it’s worth remembering the bear market that followed the dotcom crash in 2000, when stock prices rallied 20% or more on four separate occasions and only bottomed almost two years after the bear market began.

This is important because of where we find ourselves today. The stock market has recently rebounded 13% from its previous lows, getting investors excited that we could be set for a turnaround. But as the above example reminds us, we might just have found ourselves in the midst of a temporary rally – one that could have a lot further to run if the 20% gains of the post-dotcom bear market are anything to go by. Put simply, just because stock prices are rising doesn’t mean we’re in a bull market again.

But even if you recognize that we’re still in a bear market, the solution isn’t to short the market. For one thing, sizing the trade is very hard to do: you could suffer unsustainably large losses if your position is too big, and you might not make much money if it’s too small. And for another, you’ll be under a lot of pressure when one of these rallies moves against you: it might be temporary, but that doesn’t mean it’ll feel temporary as your losses mount. You’re arguably much better off buying in gradually as prices fall, or to turning your attention to other markets that present more interesting opportunities, like long-term bonds and the yen.



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