Beware of the Bear Market Rally
Today, the Dow Jones rallied 11.37%, which was the highest return since March 15th, 1933, when the Dow closed at 62.10 and was up 15.34%. The only other day during this century where we saw the Dow have a daily return higher than 11% was on October 3rd of 2008. I think we can see that these two previous highs were in the midst of two of worst market periods in our history, well, until this "virus recession" is completed. So, as we say beware of bear market rallies, where it seems like the deep losses are suddenly ending. Well we could say its like a Trojan horse, or in this case, more like a bear wearing a bull costume.
In our previous post we showed how the most volatile periods tend to have the highest and the lowest, daily returns, in history as the bungee cord reaction takes months to settle.
To look more closely at the last 11% daily return (blue lines) in 2008, we can see below that even though we had an 11.08% return on 10/13, the Dow Jones was down -22.53% in cumulative returns (red line) until 3/9/2009. March was the bottom of the 2008 recession.
Dow Jones (10/10/2008 - 03/09/2009)
Source: AETOLIA CAPITAL
The next chart shows that during 1933, where we saw similar volatility, such as 2008 and today, there were many daily moves that were both positive and negative.
Dow Jones (1933)
Source: AETOLIA CAPITAL & KOYFIN
Finally, the YTD chart below shows that we have been seeing large moves for one month but that cumulative performance of the Dow Jones is -27%, this year.
Dow Jones (YTD 2020)
Source: AETOLIA CAPITAL & KOYFIN
We have touched upon this before, that investors must be cautious to jump in late into these large moves in a single trading day, with the idea that it can only go higher. If you also look at the chart above you can see that the day after a sharp upward move there was a downward move.
To dig deeper into today's move this was the market pricing in the stimulus package that we are all awaiting for workers and businesses that are being badly affected by the economic shutdown. It's possible that they announce the package and we see a small spike tomorrow. And we are likely to keep seeing stimulus being poured into the economy by Congress and the Federal Reserve. But there is so much that still needs play out with this economic shutdown that we are still months away from where we can say there is some light of opportunity. So beware of the rallies that might look you were left behind.
If you have any questions or comments, please contact me.
Chief Investment Officer
AETOLIA CAPITAL LLC
3828 Kennett Pike
Greenville, DE 19807
Office: 302-543-4446 Fax: 302-510-4166
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