How Far Can Bear Market Rallies Extend?

By Mar 11, 2009, 1:39 PM Author's Blog  

Stocks rallied significantly yesterday, leading many people to wonder if this is “the bottom” in equities. Given that none of the problems in the U.S. economy have been resolved, I think that this is a bear market rally.

With that in mind, it is interesting to look at how much equities could rebound in a bear market rally. The best analog for the economy today is the Great Depression. Therefore I’ve pulled up the chart of the S&P during the Great Depression. The index fell as much as 86.5 percent before it finally bottomed. The sell-off was not without relief rallies. Between 1929 and 1932, there was 6 “bear market rallies” that ranged from 12 to 110 percent. The S&P was trading at much lower levels then but on a percentage basis, bear market rallies usually extend 25 percent. With that in mind, since the S&P 500 bottomed out on Friday, the index is up close to 8 percent. A 25 percent move would put the index at 833.

How does this relate to currencies? Further gains in U.S. equities would mean further strength for the EUR/USD. So if the S&P 500 hit 833, the EUR/USD could break 1.30.

How Far Can Bear Market Rallies Extend?

Image: Bloomberg

  • SHARE:
  • Share on StockTwits

LEAVE A COMMENT

SPY201.66  chart+2.28  chart +1.14%
GOOG559.08  chart+8.77  chart +1.59%
AAPL108.00  chart+1.02  chart +0.95%
TSLA241.70  chart+3.04  chart +1.27%
BBRY10.50  chart+0.02  chart +0.19%
NFLX392.77  chart+13.76  chart +3.63%
FB74.99  chart+0.88  chart +1.19%

Nikkei16413.76  chart+755.56  chart +4.83%
Shanghai2420.178  chart+29.102  chart +0.00%
UK6546.47  chart+82.92  chart +1.28%
France4233.09  chart+91.85  chart +2.22%
Germany9326.87  chart+212.03  chart +2.33%