Is This A Bear Market Rally?

Nov. 13, 2011 3:08 AM ETSPY, DIA, QQQ213 Comments

Let’s make one thing clear from the outset. Value added by traders and investors during a “bear market rally” is worth just as much as value added during a bull market rally.

The difference is a matter of time frames. A bear market rally is generally a prelude to a subsequent decline that penetrates the prior lows.

Bear market rallies are a dangerous phenomena because they tend to be dramatic affairs that entice investors and traders to go long equities despite a lack of validation by solid fundamental and technical criteria. The decision to buy into such a rally is usually regretted by investors and traders when the market swiftly makes a move towards new lows. After the peak of a bear market rally is reached, the decline is generally so swift that most investors are unable to exit the market at a price higher than their original entry basis.

Thus, the question: Is the rally that commenced on October 4, 2011 a bear market rally?

What Is A Bear Market Rally?

First, we should define a bear market rally. Be advised that you will not find this definition in any trading almanac. This is my own definition. However, I believe that this specification will accord with general understandings of what constitutes a bear market rally.

  • A “bear market” is defined as a general stock market decline in which major stock indices decline by roughly 20% or more, from peak to trough.
  • A bear market rally is a significant general stock market advance (10%-25% from trough to peak) following a bear market decline that fails to capture the previous peak and/or sustain itself over said peak for ten or more consecutive trading days.
  • The requirement to recapture the previous peak is relaxed if the prior decline was particularly steep – specifically 25% or

This article was written by

James A. Kostohryz profile picture
A master portfolio strategist is your asset allocation coach.
James A. Kostohryz has more than twenty years of experience investing and trading virtually every asset class across the globe. After working exclusively with investment institutions for over two decades, Kostohryz now offers a very unique service that is specifically designed for individual investors: Successful Portfolio Strategy, offered through the Seeking Alpha Marketplace.

Kostohryz started his investment career as an analyst at one of the world's largest asset management firms covering sectors as diverse as emerging markets, banking, energy, construction, real estate, metals and mining. Later, Kostohryz became Global Portfolio Strategist and Head of International Investments for a major investment bank.

Kostohryz currently manages JK Investment Consulting, a firm specializing in: 1) Global portfolio strategy; 2) Risk analytics; 3) Macro forecasting; 4) Business cycle analysis; 5) Quantitative analytics. Kostohryz is also founder and CEO of Investor Acumen, a service dedicated to empowering individual investors to achieve their investment goals.

Born in Mexico, Kostohryz grew up in Colombia and South Texas. He graduated with honors from both Stanford University and Harvard Law School. He is a former NCAA and international-class decathlete and has stayed active in a variety of sports. Kostohryz pursues various intellectual interests and is currently writing a book about the impact of culture on economic development.

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