The Market After Bear Rallies

Over the last few weeks, the Chart of the Day service has presented several charts that reflect the market's performance subsequent to bear rallies. As they say a picture is worth a thousand words. Chart of the day notes in their first chart,

"...a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. The current Dow rally has followed a path that is fairly similar to that of post-massive bear market rallies. The initial surge of the current rally lasted nearly 300 trading days and has been trading flat/choppy ever since. It is worth noting that the current rally just made new rally highs. However, both the 1932 Dow rally and the 2002 Nasdaq rally briefly made new highs during their flat/choppy phases. If the current rally were to continue to follow the post-massive bear market rally pattern, the current choppy phase would continue for another 150+ trading days (i.e. 7+ months)."

From The Blog of HORAN Capital Advisors

The x-axis in the above chart is presented in days; thus a shorter time frame than the chart below. In the below chart, for both the 2000 to present S&P 500 (blue line) and the 1929-1949 S&P 500 (gray line) have been normalized to where each of their peaks begin in year zero and at the $100 level. COTD notes,

"What is of interest is not that both of these markets had declines and rallies of equal magnitude -- they did not. What is of interest is that both bear markets have tended to head in the same direction for approximately the same amount of time. For example, both bear markets suffered through a major decline during the first 2 1/2 years and then rallied sharply into year seven. Both markets then formed a major peak in year seven and declined sharply in the middle of the eighth year. Both bear markets have continued to follow a similar path following the eighth year trough. However, if this similarity in direction were to continue, the current stock market rally would need to close out in fairly short order."

From The Blog of HORAN Capital Advisors

The question for many investors is what will be the future direction of the market as the 2010 year closes and we move into 2011?