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


SPY195.00  chart+2.87  chart +1.49%
GOOG626.91  chart+15.62  chart +2.56%
AAPL110.38  chart+0.80  chart +0.73%
TSLA247.57  chart+7.69  chart +3.21%
TWTR26.31  chart+1.63  chart +6.60%
BBRY6.34  chart+0.26  chart +4.28%
NFLX106.11  chart+0.13  chart +0.12%
FB92.07  chart+1.12  chart +1.23%

Nikkei17725.13  chart+2.71  chart +0.02%
UK6129.98  chart+57.51  chart +0.95%
France4458.88  chart+32.34  chart +0.73%
Germany9553.07  chart+43.82  chart +0.46%

EUR / USD1.1210  chart+0.0000  chart +0.00%
GBP / USD1.5178  chart-0.0002  chart -0.01%
CAD / USD0.7602  chart+0.0000  chart +0.00%
AUD / USD0.7053  chart+0.0002  chart +0.03%

Gold Fut1133.20  chart+1.20  chart +0.11%
Oil Fut40.94  chart-0.20  chart -0.49%