Stop Thinking The 30% Stock Rally Means The Bear Market Is Over

Now that stocks have rallied nearly 30% off their low, pundits agree: It’s a new bull market.  So be very afraid.

Market punditry is a lagging indicator, not a leading one.  Pundits are excellent at describing what has happened, not what is going to happen.

But doesn’t the 30% rally off the bottom obviously mean that the bears are fools, that it’s finally safe to get back in the water?  No.  It doesn’t obviously mean anything. 

Take a look at the charts below, from Doug Short.  (Check out the interactive version here >)

First, the “mega-bear quartet”–an overlay chart of the bears that began with the DOW in 1929, the NIKKEI in 1989, the NASDAQ in 2000, and the S&P in 2007.  The last one, the current bear, is the blue line. The horizontal axis is time from the peak, measured in years.

If you’re feeling confident that the 30% rally means that happy days are here again, take a look at the humongous rallies in the NIKKEI (red) and NASDAQ (green) that happened at this point in the process.  Then look at what happened afterward:

If that doesn’t sober you up, check out the extended dance remix of the same chart, lasting 19 years instead of 10.  It doesn’t get much better:

But, yes, you’re right, it’s also possible that the recent rally is the start of a Great New Bull Market.  Bear markets have always ended eventually (though Japan’s hasn’t yet).  Here’s Doug’s snapshot of the past hundred years of bear markets, as well as a slide show showing the details how each one ended:

You can click through a slideshow showing each of these periods in detail here >

 

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