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“Market Insight: Beware The Snap-Back Rally”
By Joe Withrow, Head of Research, Bonner & Partners
“The current bounce in U.S. stocks could be a precursor to another big drop. That’s the message from today’s chart, which measures the S&P 500’s short-term response immediately after falling 20% or more. As you know, the S&P 500 closed at 2,351 this past December 24 – 20% below its all-time high of 2,930, set on September 20, 2018. But now, stocks are rallying. The S&P 500 is up 8.4% since Christmas Eve. That has the financial media celebrating the end of the correction. But don’t let this snap-back rally fool you – this is normal behavior for a bear market.
Today’s chart tells us that the S&P 500 often moves higher immediately following a 20% fall. The blue bars show the index’s one-month performance after the 20% drop. And as you can see, four out of the six times the S&P 500 fell 20%, the index climbed in the following month. And in the two instances when it fell, the losses were manageable. These snap-back rallies are usually accompanied by the financial media proclaiming the worst to be over… which can cause retail investors to let their guard down. Do not make that mistake.
Have a look at the red bars on the chart. They show the SP’s total bear market loss when it’s all said and done. You can see that it’s not pretty. In each instance of a 20% fall, the S&P performed reasonably well the next month, only to suffer even bigger losses down the line. So do not let the strong rally we have seen over the past two weeks fool you – stocks are not out of the woods yet. The current snap-back rally could soon fade… and that’s when we will find out how bad this bear market will be.”
