06/14/2022
HOW THE BEARS TRAP THE BULLS
One important distinction is the difference between a bull market and a bear market rally. A bull market is a sustained uptrend in stocks and one that typically results in new all-time highs being reached over and over. So far we have only had one this year at the very beginning.
On the other hand, a bear market rally refers to a rise in prices after the plunge into a bear market, but one that is just a temporary rise before new lows. To envision this concept, consider how the 2007-2009 bear market unfolded.
High volatility primarily occurs in bear markets. In eight previous bear markets the S&P500 experienced rallies of greater than 2.5% more than 120 times as the benchmark plunged from peak to trough. From the collapse of Lehman to the financial crisis bottom in March 2009, the S&P500 rallied more than 4 percent on 13 different occasions. This is how they trap you. They toy with your emotions and FOMO kicks in! The action on such short-covering rallies can be frenzied and when all the short covering is over, the market drops again like a rock.
DID YOU KNOW?
The top 10 biggest rallies in percentage terms, in the Dow Jones before 1950, happened in the years: 1929, 1931, 1932 & 1933. This was during the worst stock market crash and bear market of all time during the Great Depression. These rallies were just volatility inside a long-term downtrend.
The top 10 biggest percentage rally days since 1950 took place in 1987, 2002, 2008 and 2009. These also occurred during the worst bear market sell offs in the past 35 years.
In most cases a big bullish rally during a bear market downtrend is an opportunity to exit with any short term long side profits or sell short before it goes lower again.
Are we in one now? That's for you to decide. I'm not nieve enough to believe stocks only go up. I hope for the best but prepare for the worst that way I never end up being a bag holder. When entering a stock/crypto you should always have an exit plan if it goes north and south.
If you fail to plan, then you are planning to fail.
Unless you're a long-term holder, as a multi-year bear market shouldn't bother you.
