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A Bear Market is More Likely to See One-Day Rallies Like Those We've Seen Recently

March 1, 2024
minute read

Substantial single-day gains in the stock market, exemplified by the Nasdaq 100's 3% surge on February 22, should not automatically be interpreted as indicative of a bull market. It is essential to apply a reality check to the exuberance witnessed on Wall Street following this notable increase, primarily fueled by Nvidia's outstanding earnings. Contrary to common perceptions, significant daily rallies occur more frequently within the context of a bear market.

To illustrate this point, I have crafted a chart by computing the percentage of trading days for the Nasdaq 100 index during bear markets. The determination of precise bear-market initiation and conclusion dates relies on the calendar provided by Ned Davis Research. The chart underscores that days featuring substantial gains are more prevalent during bear markets, and this frequency intensifies with the magnitude of the rally.

To contextualize the chart, it's crucial to note that 16% of trading days since the inception of the Nasdaq 100 in 1985 have unfolded during periods classified as bear markets by Ned Davis Research (represented by the red line in the chart). If significant daily rallies were random occurrences, one would anticipate no more than 16% of them to transpire in a bear market. However, the data reveals that, over the past four decades, when the Nasdaq 100 experienced a rise of at least 10% in a single day, no fewer than 90% of these instances transpired during a bear market.

Even as we lower the threshold to daily rallies of at least 3%, the frequency during bear markets remains three times larger than what one would expect under the assumption that significant rallies occur randomly, whether in bull or bear markets.

These findings serve as a reminder not to be overly swayed by market rallies. If we solely relied on the magnitude of the recent one-day Nasdaq rally, a prudent conclusion would suggest an elevated probability that we are either currently in a bear market or on the brink of entering one.

The heightened volatility observed during bear markets is a significant factor contributing to these outcomes. While many investors recognize that the CBOE Volatility Index (VIX) tends to ascend during market downturns, there is a lesser-known aspect: substantial rallies are just as instrumental in influencing volatility as significant declines. This nuanced understanding challenges the misconception that periods of heightened volatility are exclusive to substantial market declines, emphasizing the need to avoid such oversimplifications.

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Cathy Hills
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Eric Ng
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John Liu
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Cathy Hills
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