Search

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.

Regards,

John Anagnos

Managing Principal

Chief Investment Officer

AETOLIA CAPITAL LLC

3828 Kennett Pike

Suite 212

Greenville, DE 19807

Office: 302-543-4446 Fax: 302-510-4166

john.anagnos@aetoliacapital.com

www.aetoliacapital.com

Disclaimer

Aetolia Capital, LLC (“Aetolia”) is a Registered Investment Advisor ("RIA") registered with and resident of the State of Delaware. Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Aetolia renders individualized responses to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion.


This communication is intended to provide general information about Aetolia. It is not intended to offer investment advice, or to offer or recommend the purchase or sale of any securities or investment product. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement, and shall be subject to the terms and conditions therein. Information regarding investment products and services are provided solely to inform the reader about our investment philosophy, our strategies and to be able to contact us for further information. Please do not forward or replicate without our permission.










MARKET INSIGHT