Is It A False Rally?

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May 14, 2000

Thanks for the feedback I have received on the blogs, I am glad I have been able to provide some interesting history and guidance.

I have done some work to answer a good question one reader asked: Do bear markets tend to have a “false recovery” followed by another significant decline like a lot of people are claiming this might be?

Unfortunately, Yes

It is just a matter of how much the market falls.  I filtered out the small ups and downs by only looking at the first major rally in the bull markets.  In the History is no Mystery: Part II blog we saw that the median bull market takes 4 months to rally 25%.  As the top row of bars in Chart 1 shows, those first major bull market rallies continued a little longer, with the median at 5 months (left side, top scale) with an increase of 40% (right side, bottom scale).  In 2020 the first rally high was likely reached on April 29, delivering a 35% increase over just one month.

Chart 1

Source: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

But the Corrections Are Over Quickly  

Chart 2 shows that the corrections from the first major rallies in Chart 1 happened quickly, with the median just under a month (left side, top scale) with a 7% decrease (right side, bottom scale).  The range for all bull markets since the 1950’s has been consistent, with the decline being around a month and under 10%.  The 2020 rally trimmed 4% from the April 29 high by the close on Friday.

Chart 2

Source: Yahoo Finance, National Bureau of Economic Research, J.P. Morgan Asset Management

What It Means Now

Assuming March 23 was the bottom of the S&P at 2,191 and April 29 was the top of the first major rally at 2,955, then history and the median tell us there should be a further correction this month down to 2,700 to 2,750.  Of course we can always go lower, I am just providing the probable decline.

The Good News

After the correction to the first major rally, all the bull markets continued to rise for months afterwards, so buying more in May can work over the long term.

Invest Wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.