How bear market rallies trap falling buyers and frustrate investors

How bear market rallies trap falling buyers and frustrate investors

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Thursday 23 June 2022

Today’s newsletter is from Jared Blikre, a reporter focused on shopping at Yahoo Finance. Follow him on Twitter @SPYJared.

Rally in the bear market is the material of legends.

The purpose of the bear market rally is to maximize investor pain, born of a combination of conditional trading and FOMO – or the fear that we will lose the opportunity to investors. And these facts do it well.

The market is tempting to new long, to finally send the shares to new lows.

At the beginning of the bear market, these rallies are impressive and short-lived. As the market shrinks, these rallies tend to get bigger, more exciting and quite misleading.

During the financial crisis, the market misled investors with three short rallies from autumn ’07 to summer ’08 – 8%, 12% and then 7%, respectively – sucking in new longs near record highs of 2007.

A trader works on the New York Stock Exchange (NYSE) in New York, USA, June 13, 2022. REUTERS / Brendan McDermid

A trader works on the New York Stock Exchange (NYSE) in New York, USA, June 13, 2022. REUTERS / Brendan McDermid

And then the markets really started to get involved with investors.

The 45% and 51% reductions from record highs were met with a rally of 18% and 24% in the autumn of 2008, moves that came several months before the absolute bottom of the market in March 2009.

Suddenly, the headlines read: “20% discount on the stock market”, enticing injured investors to possibly pull the trigger for what was left of their cash position – only to see new lows in the coming weeks and months.

S&P 500 - Global financial crisis brings market rally

S&P 500 – Global financial crisis brings market rally

During the dot-com bubble burst, it took almost three years for the bear market to finally drive away the first technological frenzy.

The S&P 500 fell 49% from a record high before reaching its absolute low at the end of 2002. During 2001 and 2002, the S&P 500 recorded no less than four rallies of 19% or more.

Only in the spring of 2007 would the benchmark reach another high record. Just in time, of course, for the aforementioned Financial Crisis.

S&P 500 - Tech Bubble Crash Bear Market Rally

S&P 500 – Tech Bubble Crash Bear Market Rally

Bear Markets test investors, both up and down. When the news cycle seems to no longer be scary, stocks bind an olive branch. Maybe it’s a relief from a hawk central banker or a drop in high oil prices.

However, regardless of the catalyst, bear market rallies can send stocks to races and tired investors do not want to miss the opportunity.

Rinse, repeat.

At its most recent lows, the S&P 500 (^ GSPC) fell more than 23%, and rallies so far this year have been shallow and short-lived. The biggest was a move of about two weeks in late March that produced an 11% recovery for the index.

The March move was particularly hard for investors, as this rally hit a February high not far from the S&P 500 record closed on January 3, 2022. Anyone who bought this overrun suffered a 16% loss over the next seven weeks.

This bear, it seems, is still young.

A less strong 7% rally in late May and early June was knocked down by inflation that raised its ugly head again, with the four-decade high of the consumer price index leading S&P to the “official” bear market.

And now we just get out of the new lows. Again.

S&P 500 - Rally Bear Market 2022

S&P 500 – Bear Market Rally 2022

From here – if history’s any guide – this bear market will become more difficult and more frustrating as the next rallies probably get bigger.

“If they don’t scare you, they wear you down,” says AlphaTrends.net founder Brian Shannon.

Something to remember if we are sitting here at the end of June, or July or August and watching the biggest rally of the year.

What to watch today

Economy

  • 8:30 a.m. ET: Current account balance1st quarter (-275.0 billion dollars expected, -217.9 billion dollars in the previous quarter)

  • 8:30 a.m. ET: Initial unemployment claimsweek ended June 18 (226,000 expected, 229,000 last week)

  • 8:30 a.m. ET: Continuous claimsweek ended June 11 (1.320 million expected, 1.312 million last week)

  • 9:45 a.m. ET: S&P Global US Manufacturing PMIJune preliminary (56.3 expected, 57 last month)

  • 9:45 a.m. ET: ET: S&P Global US Services PMIJune preliminary (53.5 expected, 53.4 last month)

  • 9:45 a.m. ET: ET: S&P Global US Composite PMIJune preliminary (53.6 last month)

  • 11:00 a.m. ET: Kansas City Fed Manufacturing ActivityJune (23 last month)

Profits

Pre-purchase

  • FactSet research (FDS) is expected to report adjusted earnings of $ 3.21 per share with revenue of $ 476 million

  • Rite Aid (RAD) is expected to report an adjusted loss of 66 cents per share with revenue of $ 5.7 billion

  • Apogee Enterprises (APOG) is expected to report adjusted earnings of 55 cents per share with revenue of $ 326.22 million

Post-market

  • FedEx (FDX) is expected to report adjusted earnings of $ 6.86 per share with revenue of $ 24.57 billion

  • Black berry (BB) is expected to report an adjusted loss of 5 cents per share with revenue of $ 163.5 billion

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