Don’t Buy Shares During A Bear Market Rally
So when’s the most dangerous time to buy shares? Many people think it’s after a big price rise. They’ll say a stock is expensive and due for a fall. But do you know what… they’re often wrong. A stock in an uptrend often keeps rising.
The most dangerous time to buy will probably surprise you… it’s not when prices are high, it’s when they are low. And the reason for this is that stocks that have been falling, often fall further.
In this video, I’m going to tell you about bear market rallies. These are one of the most deceptive parts of the stock market cycle. And if you don’t have a plan to avoid them, there’s a very real chance they’re going to cost you money.
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So let me tell you about bear market rallies. From an all-time high on 12 February 2020, the Dow Jones fell for 21 out of 28 days. It was virtually one-way traffic. The market didn’t register consecutive up-days during the entire fall.
Then, from a point of extreme fear, stocks rallied… Up 11.4%, up 2.4%, up 6.4%. In a blink of an eye, the Dow put on an historic 3,960 points, or 21.3%. This is the biggest three-day surge since 1931. It also includes the largest single-day points rise ever.
Now, many people look for this type of advance. They believe it signals a major low is in place. And they scurry to buy into the market before prices rise any further. But often it’s a trap. You see, most bear markets include a series of strong rallies. These periodic uplifts often provide a false sense of hope before the market once again turns lower.
So, why should you be wary of bear market rallies?
Well, consider the most notorious bear market of them all… after crashing 49% in 1929, the Dow rallied 48% over four months. But it wasn’t a new bull market — it was a bear market rally. Stocks ultimately fell by a total of 89.2%. Woven into the decline were monthly gains of 8%, 9%, 12%, and 14%. There were also multi-month rallies of 15%, 23%, 26%, 34%, and 25%.
By the time it was over, few people would have been asking: When to buy stocks? The general mood at the bottom was complete disinterest. Many investors had lost everything, and those still standing were likely worrying about yet another decline.
Now, the point of showing you the previous chart isn’t to alarm you. Every bear market is unique in size, duration, and the course it takes. While they have similarities, no two are the same.
The point is to show the deceptive nature of bear market rallies. You’ll only know the final low in hindsight. Here’s a more recent example of major bear market:
This is the All Ordinaries during the global financial crisis (GFC). It shows the market at both its peak and the eventual low. I’ve marked some of the key rises and falls within the decline.
Now, have a look at the rallies… up 16%, up 18%, up 9%, up 10%, 16%, up 17%.
Any of these could have been an emerging bull market. But they weren’t. And that’s what makes these periods so hard. While a bear market rally may look and feel like the real thing, it’s not. The market eventually gives back all the gains. That’s why rushing in at the first sign of strength is risky.
Another difficulty relates to emotions. You see, a sharp rally often causes FOMO, or the fear of missing out. Many people see prices rising and hurry to buy themselves. Their buying is often emotional, not strategic. And as you know, markets aren’t the place for emotions.
You’ll typically hear all sorts of predictions during a big decline. Some people claim that stocks will recover quickly, while others will say that a cataclysmic crash is just beginning. And this can make it hard. You don’t know who to listen too.
That’s why it’s so important that you have a plan. This helps guide your decision making no matter what happens. A good plan can help you protect your capital when prices are falling. And it can get you back into the market when a recovery appears sustainable. And this helps you avoid bear market rallies.
In my next video, I’ll explain the two key strategies I use to re-enter the market after a big fall. To get a notification of it’s release, make sure you hit the subscribe button and click the bell icon. You can also get a free strategy report from my website www.motiontrader.com.au
As always, if you enjoyed this video and thought it was valuable, then please click the like button and share it with your friends. Thanks for watch, I’m Jason McIntosh, and let’s find some trends this week.
I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.