Even the Biggest Bear Markets Have Rallies

 

This is a good thing, for two reasons. First, if you are late getting out of the market, you can always use the latest rally to exit at better prices than existed at the low a few weeks or months prior. Second, if you are already out of the market or making money on the downside, rallies are great opportunities to take on or add to new short-side positions. The chart below shows the decline of April 1930 to July 1932. On a long-term graph, it looks like one relentless swoop. When you examine weekly prices, you can see the half dozen or more substantial rallies within it.

The stock market was in double-digit rally mode for more than a third of the calendar days in question. Any one of those rally days could have been called "the low." Some probably were. The overall period was the Dow Industrials from April 1930 to July 1932, and it devastated investors. The Dow lost 86% of its value, rally days notwithstanding.

These rallies were the moments when the bear was catching his breath.

Every time the stock market rallies - at least until valuation returns, psychology turns pessimistic and the wave pattern is complete - think of this chart.

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