Stocktake: Bear market rallies no cause for cheer

Is there anything as unnerving as an enormous one-day market rally?

Well, yes – an enormous one-day decline. Still, there is something unsettling about the kind of action we saw last Wednesday, when German and French indices soared 7.9 and 7.1 per cent, respectively.

On the same day, the S&P 500 experienced eight intraday moves of 1 per cent – the same number seen in all of 2017, noted Piper Sandler. By the close, the index had enjoyed its biggest one-day gain since June 2020, just two days after it suffered its biggest one-day drop in 16 months.

"Nothing like this happened last year," commented Jim Bianco of Bianco Research. This kind of volatility doesn't happen in bull markets, he added.

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That's not entirely true. Big one-day gains are occasionally seen at market bottoms or even during uptrends, countered sentiment expert Urban Carmel.

Still, fierce but fleeting rallies are a feature of bear markets. Bespoke Investment notes that, before going bust in 2008, Lehman Brothers saw separate rallies of 24, 53, 26, 70 and 34 per cent. From late November through year-end 2008, Bespoke adds, the S&P 500 rallied more than 20 per cent, but another wave of huge selling meant stocks didn't bottom until March 2009.

Will things be different this time? Maybe, but it would be prudent to prepare for continued volatility, rather than interpreting every relief rally as a sign the worst is over.