1/18/2019 Weekly Update: The Rally Continues
by Zach Marsh on Mar 1, 2019
S&P 500 +2.85%
10 Year Treasury -0.65%
Weekly Update: The Rally Continues
The market picked up where it left off last week--riding a powerful, counter-trend rally that began on December 26. Last week, we described this rally, from the Christmas Eve lows, as a bear market rally. Bear market rallies can be quite large and convincing, while also being violent in nature. Think of a market crash but inverted. To date, the S&P has rallied 13.8% from the bottom, and the Russell 2000 small-cap index has rallied nearly 17%. This is indeed an impressive rally and one that demands attention. But what differentiates the real deal from a fake out rally.
During this bull market, which began in March 2009, we have witnessed a number of corrections which were immediately followed by V-shaped recoveries. Here are some examples:
Date S&P Decline Recovery Rally and Length
May-June 2013 -5.75% 7.5%, 12 trading days
Sept-Oct 2103 -5.2% 5.9%, 7 trading days
Sept-Oct 2014 -9.5% 10.26%, 12 trading days
July-Aug 2015 -12% 12.7%, 48 trading days
We have become so accustomed to this reflexive rally that missing out on it can feel painful. But we must remember that simply depending on recent market responses to sell-offs ignores the painful lessons from past bear markets. We can choose to simply amble along, assuming that this is just another garden variety correction, and pile back into the stock market with blind certainty that we will be back to the old highs in no time at all, or we can patiently wait for more information as regards to the longer term market environment. Because, after all, during each bear market there have been many counter-trend rallies that could easily have been mistaken for V-shaped recoveries.
Conversely, below are some examples of previous bear market rallies, which missed out on being long-sustained, V-shaped recoveries:
Date S&P Decline Rally and Length Subsequent Decline
Oct 2007-March 2008 -19.4% 14.46%, 41 trading days -53.5%
Sept 2000-Apr 2001 -29.67% 22.26%, 41 trading days -41.6%
July-Sept 1998 -21.47% 14.3%, 16 trading days -13.8%
Aug-Oct 1987 -33.2% 14.9%, 2 trading days -14.4%
Dec 1968-Jan 1969 -10.8% 8.25%, 20 trading days -33.7%
Oct-Dec 2018 -20% 13.8%, 17 trading days ???
In the 2008, 2001, and 1969 rally investors who bought into the rally would have to wait years until they would see those levels again. In 1987 and 1998 it would take a retest of the lows to signal a more sustainable rally.
We need to keep in mind where we stand to date in this market correction. From October 1 until December 24th the market fell 19.8%. The rally off the lows has only recouped 56% of those losses. Until this market confirms a trend reversal it is difficult to fully embrace this rally. We remain hopeful that this correction which began in October is just a pause in a longer term bull market cycle, but prudence requires affirmation. Because if this is just a bull cycle pause, like 1987, then forgoing the first 15% rally from the lows is dwarfed in the context of the 13 year rally of over 500% that followed. Likewise, if this turns out to be a bear trap and the market falls back another 50%, we will be grateful for being cautious.
Thanks for reading,
Zach and Dave
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