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:

LEAVE A COMMENT

SPY198.65  chart+0.01  chart +0.01%
GOOG593.35  chart-2.63  chart -0.44%
AAPL97.03  chart-0.16  chart -0.16%
TSLA223.54  chart+1.05  chart +0.47%
BBRY10.38  chart+0.55  chart +5.60%
NFLX425.38  chart-2.52  chart -0.59%
FB74.98  chart+3.69  chart +5.18%

Nikkei15284.42  chart-44.14  chart -0.29%
Shanghai2105.062  chart+26.573  chart +1.28%
UK6821.46  chart+23.31  chart +0.34%
France4410.65  chart+34.33  chart +0.78%
Germany9794.06  chart+40.50  chart +0.42%