As I've said before, bear market rallies can be devastating to the short sellers because just as it looks like the market is turning lower, a piece of positive news occurs at a time when the market is most oversold and the shorts run for cover.
This usually drives the market higher with a dramatic explosion of buying, but just as the shorts exhaust their panic buying, the market turns down and eventually buries any new bulls as it dives to its former low.
According to a study by Citigroup (NYSE: C), bear market rallies last about 3.6 months with an average advance of about 21%.
And here is an interesting fact: Four of the 10 biggest one-day rallies in history occurred during bear markets. The last big bear market rally occurred Nov. 21 to Jan. 6, for a gain of 24%.
So far, the current rally that started on March 9 is up 21.57% on the S&P 500 with just 10 trading sessions behind it. Yesterday it was accompanied by modestly higher volume of 1.9 billion shares -- not exactly evidence of major institutional participation and certainly not enough volume to penetrate the huge overhead constructed from October '08 to February '09.
To qualify as a change in major trend under the Dow Theory, prices must exceed the highs of January at Dow Industrial Average 9,088 and Dow Transportation Average 3,737, and that's a long way off.
With all internal and sentiment indicators now grossly overbought, the outlook is for the current rally to slow and then reverse.
The Treasury Department's proposal needs much discussion and explanation, and it will get that in the press and on Capitol Hill. And we'll be reviewing the first Q1 earnings shortly, which aren't expected to be good. It looks to me that there will be many days of angst before this bear retreats to its den.
Sam Collins is a contributor to OptionsZone.com.
Entrepreneur's Journal: Want to get a piece of the Buffett/Goldman honeypot?
The week in preview: No turkey earnings from Tyson, Hormel, Cracker Barrel ...
Comfort Zone Investing: Intel is saying something ... can you hear it?
Reader Comments (Page 1 of 1)
3-24-2009 @ 1:39PM
Ysleiro said...
If this is true then I'm screwed. I just started trading and I'm about to get stomped.