Yesterday we put this recent stock market rally in the context of historical bear market rallies.
By quick way of review.
- It is extremely common for stocks to rally, and sometimes by quite a lot and for as long as two months, during a secular bear market.
- During the Tech Crash, the S&P 500 experienced four rallies, ranging from 10% to 25%, and lasting two weeks up to 2.5 months.
- During the Housing Crash, the S&P 500 experienced four rallies, ranging from 10% to 15% and lasting one to two months each.
In this context, the current rally in stocks is 9 weeks old (a little over two months) and has seen the S&P 500 rally some 17%.
This begs the question… if this is indeed a bear market rally… when will it end? Put another way, when does the next leg down begin?
Historically, the 40-week moving average (the same as the 200-day moving average) has been a line of GREAT significance during bear markets. During the Tech Crash, the S&P 500 was never able to break above this and stay there.
A similar dynamic played out during the Housing Crash. Here again, the S&P 500 was unable to reclaim the 200-DMA/40-WMA.
So where are stocks trading today in relation to this line?
The S&P 500 is just about to test its 200-DMA/40-WMA. If history is any guide, it won’t be able to reclaim this line and stocks will begin their next leg down in the next few weeks.
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