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.

Graph 1

Image: Bloomberg

  • SHARE:
  • Share on StockTwits

LEAVE A COMMENT

SPY207.97  chart+1.64  chart +0.79%
GOOG698.21  chart+5.20  chart +0.75%
AAPL93.64  chart-0.10  chart -0.11%
TSLA241.80  chart+1.04  chart +0.43%
TWTR14.40  chart-0.22  chart -1.50%
BBRY7.06  chart+0.00  chart +0.00%
NFLX93.11  chart+3.08  chart +3.42%
FB118.57  chart+0.99  chart +0.84%

Nikkei16147.38  chart-518.67  chart -3.11%
UK6178.09  chart-63.80  chart -1.02%
France4374.79  chart-67.96  chart -1.53%
Germany9937.90  chart-185.33  chart -1.83%

EUR / USD1.1553  chart+0.0026  chart +0.23%
GBP / USD1.4626  chart-0.0039  chart -0.27%
CAD / USD0.7927  chart-0.0050  chart -0.63%
AUD / USD0.7526  chart-0.0136  chart -1.77%

Gold Fut1102.80  chart-5.30  chart -0.48%
Oil Fut46.83  chart-0.26  chart -0.55%