Is This Another Bear Market Rally? Does It Matter?

There is increasing debate over whether the recent rally off the March 6th lows is indeed the start of a new trend or another bear market rally to sucker hopeful investors. To some degree it doesn't matter, if you benefited from the 28% in the past few weeks, take some profits regardless of what you want to call this. When you report your gain/loss to the IRS at the end of the year you don't have to indicate whether it was a bear market rally or not, nobody cares, all that matters is the performance.

If you are buying into this rally NOW, you might want to step back and say hey, it is okay to miss the bottom, let's see what kind of pullback we get and if the sellers come out in force or not. You don't get an award for catching the exact bottom, but you can lose significant sums of money when you try to guess the bottom and guess wrong like so many have over the past few months.

The rally since the bottom on March 6th through April 9th shares many similarities with the bear market rally off the November 21 lows. So far, the increase is similar, number of days is similar, breadth is similar. The main difference is higher volume (so far) on this rally and the VIX has not broken down like it did during the November rally. The VIX seems to be implying there is still some fear in the system, no one appears to be getting complacent which is another positive divergence.

While the current debate is centered on this rally being another bear market rally there are two major issues to consider. First, it should give you pause how many people have written this off as a bear market rally already. Only time will tell. After being burned once in October and again in November, there is reluctance to grab the bull by the horns because we are in a downtrend... until we're not. Second, while everyone is focused on THIS rally, it might be beneficial to take a step back and review the bear market decline that took place from January 6th through the March 6th bottom - forget the rally.

Let's take another look at the decline from January 6th's short term top to the bottom in early trading on March 6th to see what it can tell us about the current rally. The most glaring data point was the new lows which were 797 on March 6th. Contrast that with 1,120 lows for the 11/21 low and a mind boggling 2,477 lows on October 10th. Everyone wants to see capitulation and panic, if the selling on October 10th doesn't meet those qualifications...

On October 10th you had essentially 75% of stocks hit a new annual low with a significantly lower number of new lows on March 6th. This tells you that although the S&P hit a new low on March 6th, most stocks did NOT. This is where it is important to remember that there is no "stock market" but a market of stocks.

Many stocks had bottomed either in the October sell off or during the November decline. This is reminiscent of the top in October 2007 when the S&P hit an all time high while most stocks did NOT because many had topped out earlier and a narrow portion of the market was driving the headline numbers higher.

This activity is similar to the bottom put in by the S&P back in October of 2002. New lows actually peaked in July of 2007 and many stocks bottomed that summer. The S&P came back to retest and slightly break through to new lows in October of 2002 before igniting a cyclical bull market in a secular bear market. The staples, healthcare and energy sectors ended up bottoming in July while the rest of the sectors bottomed out in October and then it was off to the races.

It is too early to correctly label the current rally even though there is an urge to do so. Many will try, many will fail, some will get it right. Whichever call the "experts" are making, go back and see if they have already tried that call once before. There will only be one true bottom, that you can be sure of, but stop focusing on catching it and focus on being on the right side of trend whichever direction it emerges.