Trading the Feel-Good Rallies in a Bear Market

Includes: DIA, QQQ, SPY
by: Roger Nusbaum

Over the last couple of weeks I have made several references to feel-good rallies. If this is a bear market there will likely be several feel-good rallies along the way and we could be in the middle, or maybe the start, of a healthy feel-good rally.
Some examples;

On April 14, 2000 the S&P 500 hit 1339 intra-day. A week and a half later on the 25th it closed at 1477. That's 10.3% in no time. Think people were feeling good that day?

The next low was on May 23, 2000 at 1373. Two months later on July 19 it closed at 1510, a less dramatic 9.9% over two months.

On April 3, 2001 SPX had a low of 1100. On May 21 it closed at 1312, a 19.2% rally that no doubt felt great.

I'll skip the rally after 9/11 as that was an external event.
July 23, 2002 SPX traded at 797. On August 22 it closed at 962, a 20.7% lift.

Some folks will try to trade these, and be successful, and some should leave them alone. As I still believe this is a bear market, I want to be less volatile than the market. This has been my positioning for months. Given the bear market context, I would be thrilled to be up 5% versus a 10% feel good rally, and only down 5% versus a 10% drop. This of course would be a smoother ride which, again, late in the cycle is exactly where I want to be.

For some context of where a feel-good rally might go; the 200 DMA is up near 1485 (that would surprise me). There are also several resistance points along the way up to 1485, including 1350 which is about where it closed Monday.

You should decide for yourself if this is a bear market. But if it is, we should expect several rallies as part of the bottoming process. It is very normal.