Of the first and second leg rallies that followed the seven bear markets which can be said to be in the same “league” as the severe 2007-2009 decline, only once did the second leg surpass the first in terms of percentage gained. That occurred following the mother of all bear markets, the 1929-32 bear; otherwise, if the second leg ran half as far you were lucky.
Bear Mkt.– First Leg – Correction – Second Leg
1901-03 54% 10% 27%
1906-07 71% 27% 17%
1919-21 61% 10% 15%
1929-32 101% 39% 122%
1937-38 63% 24% 31%
1973-74 51% 16% 33%
2000-02 72% 29% 25%
2007-09 81% 19% 28% (as of 1/3/10)
If we exclude the extraordinary rallies that followed the 1929-32 bear market, the average first run after a severe drop is 62%, followed by a correction of around 19% before resuming to the upside for another 25%. Well, the Nasdaq has put in an impressive 81% first leg move (second only to the 101% first leg following the 29-32 bear), corrected 19% and has so far rallied a little more than 28% as of Monday’s close. Now the question is: what’s next? The answer, of course, is that nobody knows. The current rally off the August ’08 lows has run 28%, right around the historical average for a second leg rally. Can the market move higher still?
As always, the leading stocks will tell the tale. Monday’s session was positive. Many of the leaders jumped on heavy volume. So it will be interesting to watch the price action in the days and weeks ahead. January can be fickle, so don’t get complacent. Have a plan in place for the different scenarios that might arise. Don’t get caught flat-footed. Meanwhile, keep things simple and let the market and the market alone inform your decisions.