Bull or Bear Market?

by: Toro

Over on Barry Ritholtz’s blog, The Big Picture, he quotes Merrill Lynch economist David Rosenberg (whose morning market commentary I read diligently):

Even more intriguing, he observed that EVERY 300 point DJIA rally has occurred ONLY during bear markets. (Even the 1998 LTCM crisis saw two single-day gains of more than 300 points, September 8 and October 15, 1998. At its intra-day lows, 1998 had a 20% decline).

This is incorrect.  The bottom in stocks at the beginning of the most recent cyclical bull occurred on October 9, 2002, when the Dow closed at 7286.  The following day, the Dow rose 248 points to 7534.  On October 11, the DJIA was up 316 points.  Two days later, it rose another 378 points.  Therefore, indeed, there are two 300-point days during bull markets.  They last occurred at the beginning of a multi-year rally. 

I do not disagree with Rosenberg and Ritholtz’s general premise – violent moves in stocks often occur during bear market rallies.  However, they also occurred at the beginning of the last cyclical bull market.

In addition, the Dow rose 270 points on March 13, 2003 and another 282 points two trading days later on March 17 as the market retested its lows, held, then doubled over the next five years.  Those were not 300-point days, but this is semantics.  Both moves were 3.6% up days, greater than the 2.9% move on Tuesday.

I do believe this is a bear market rally.  I do not believe that the market will bottom until some time next year at the least.  However, we must keep our minds open to the possibility that the market may be at a bottom, or trying to bottom.  I doubt it, but I don't know.  The huge volume on the New York Composite on the Freddie Mac (FRE)/Fannie Mae (FNM) lows, the recent unrelenting negativity and the sharp declines in commodity prices should keep investors alert for a continued move to the upside, even if it is a bear market rally.