I saw this tweet a moment ago:

They happen a lot during bear markets, in fact some of the greenest days ever come during bear markets. They trick bulls into thinking the selling is over with.

Here’s Investopedia’s definition:

A bear Market Rally refers to a sharp, short-term price increase in a stock or market amid a longer-term bear market period. Investors can sometimes misinterpret bear market rallies as markers of the end of a bear market, and so they must be treated with caution.

It’s people buying the dip because they think the market has bottomed, but it hasn’t.

The responses to the tweet above were overwhelmingly angry, scornful and dismissive. We’re in a market environment where people get really angry if you tell them anything other than “Stonks only go up.”

Seeing how many people were angry at the author of the tweet for merely suggesting that we have already entered a bear market was enough to make me even more bearish on the market overall.

Bear market rallies tend to furiously rip higher. There were 4 big ones in 2008:

The first one was 18%, the next was 13.5%. Then you had a 20% bear market rally and a 29% rally to close out 2008.

The bear market did not end until March 2009, though.

The bear market rallies after the Nasdaq bubble burst in 2000 were even crazier:

14%, 21%, 22%, 40%, 21%. And that was just between March and September 2000!

There were more in 2001 and 2002:

28%, 43%, 51%! 14%, 12%, 19.5%.

All within a long-term downtrend.

You can make some serious money during bear market rallies. You just have to know when to sell. They never last more than a couple of months.

You have to swing trade.

The bigger point here, however, is not to allow bear market rallies to mislead you into believing the bear market is over.

If a bear market is the opposite of a bull market, then a bear market rally is the opposite of a correction. During bull markets, stocks regularly correct downwards but then resume the overall up-trend. During bear markets, stocks regularly correct upwards but then resume the overall down-trend.

We still don’t know if we’re in a bear market right now. But today felt like a bear market rally. There was just so much green. Dozens of stocks I track were up 10%+, some even up 20%. And everybody on social media is celebrating and acting like we’re defintiely out of the woods.

Here is a list of the 20 best days in the history of the S&P 500. 8 of the 20 took place in the midst of the Great Depression, from 1929-1932, when the market fell 89%. Not after it. During it. During the nearly three-year market crash. Red stars are the days that took place during bear markets. Gold stars indicate great long-term buying opportunities, and dates with no stars preceded flat trading:

14 of the 20 best stock market days in US history were bear market rallies.

Here’s a chart of the Great Depression just to help you visualize when these massive green up days occurred. The chart is the Dow, not the S&P, but what we’re focused on is when and where during the market cycle these days occurred. So the Dow chart works just fine here:

Now here’s the ones from 2008:

More pain ahead.

And then March 2020:

One of the huge up days was while the crash was still happening, but the second was the day the crash ended and was obviously, as we all know, a great buying opportunity.

Now, I understand that today’s rally was nowhere close to landing in the top 20 best days in market history. But that’s not the point. The point is that it was the type of rally you see during bear markets.

This could well prove to be the start of a new rally, and the correction may well be played out. I have no idea.

But be careful reading into today as confirmation that the rally is back on. It could have been a bear market rally, A.K.A. a “BULL TRAP.”

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