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Comparing Bear Market Counter Rallies at Trader’s Narrative

Today’s viciously down market made me think of how this bear market would stack up compared to the previous one we just went through a few years ago.

As you can see from the chart below, the last bear market had six major counter rallies. Two of them were 10% and the rest more than 20% each. After all was said and done, the market fell 49% from its peak in 2000:

bear market rallies 2000 to 2003

In contrast, we’ve seen a much more brutal decline in this current bear market. As of today’s close, the market is down 50% from its October 2007 peak. But while the drawdown is similar in magnitude, it has occurred in a much shorter time frame. While it took the S&P 500 index 1833 days to once again reach a new high from the depths of the 2002 bear market bottom, it has taken it only 489 days to lose it all:

bear market rallies 2007 to 2009

And we’ve only seen four major counter rallies, with the last one being the largest. So what does this mean?

For one, before a bear market is spent, it needs to suck in as many bulls as possible. It does this by fooling them into believing that the worst is over; by dangling the alluring bait of hope before their screens. What better way to convince you that it is safe to venture into the market than by showing you a tantalizing +20% rally?

But this bear market seems to be different. It is relentless. Merciless. And while sentiment would suggest that people are actually complacent, we haven’t seen much push back from the bulls.

A 50% decline is certainly a psychological ‘line in the sand’. Beyond that, from a technical point of view, it is an important level at which reversals take place. And yes, it is also a Fibonacci level. But of course, this doesn’t mean that the market has to do anything.

Compared to other markets, the US has held up quite well. For example, Ireland’s ISEQ index has already fallen 78% from its peak in early 2007.

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5 Responses to “Comparing Bear Market Counter Rallies”  

  1. 1 Michael Lomker

    61.8% has always been a much stronger Fib level. :)

  2. 2 Babak

    that would take us to 602 :o

  3. 3 Michael Lomker

    That’s plausible. Elliot wave predicts a target below 650.

  4. 4 blues

    We are going to 300-400s… you’ve seen nothing yet… look at Japan’s credit implosion… Yes we are not as bad as Ireland for now, but when the time comes, we going to crash down… AMERICAN SIMPLY HAS TOO MUCH DEBT… and we are no longer world economic power…

  5. 5 Michael Lomker

    >We are going to 300-400s

    I don’t like to think about it, but Elliot and K-wave theory also predicts *that* as well (but not until 2012). We should have an impressive rally in the interim. Anyone that isn’t going to time the markets should get out–hold cash, gold, or start your own business.

    If anyone is curious about wave theory, I’d recommend reading some of the free letters at this site. “Three phenomenal years ahead” contains a chart that rings true to me.

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