Despite Thursday’s explosive rally in stocks, it’s likely we’re still mired in a bear market.
In fact, the magnitude of the surge itself suggests the bear is still alive and well.
Consider all trading days since the Nasdaq Composite Index
COMP,
was created in 1971 in which it gained — as it did Thursday — more than 6%. Twenty of 26 of those days prior to Thursday occurred during a bear market, or 77% of the time, according to Ned Davis Research.
So big daily rallies occur at nearly three times the frequency you’d expect if they were to be randomly distributed across both bull and bear markets.
To be sure, you should never base an investment decision on just one indicator. But these statistics definitely throw cold water on the enthusiasm that is otherwise so much in evidence on Wall Street.
It shouldn’t surprise you that explosive rallies occur more frequently during bear markets than otherwise. Bear markets typically don’t come to an end until investors throw in the towel in despair and swear off equities — sometimes referred to as capitulation.
Until then, hope springs eternal, and beleaguered investors eagerly jump back into the market when there’s even a sliver of good news. They got that sliver Thursday morning before the market opened with an inflation report that showed slowing price growth last month.
Thursday’s rally unlocked a lot of hope: Hope that inflation will continue to recede in coming months. Hope that the Federal Reserve’s aggressive interest-rate hikes haven’t already doomed the economy to enter a recession later this year or next.
The bottom line? Big daily rallies don’t often mean what you think they do. So check your enthusiasm.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].
