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What Is a Bear Market Rally? Definition, Identification & Causes

Bear market rallies are periods when stocks go up in value briefly during a broader period of decline.
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Darkened cropped photo of a snarling bear with text overlay that reads "What Is a Bear Market Rally?"

Bear markets aren't straight, downward-sloping lines—most include several shortlived rallies that can easily be mistaken for the beginnings of new bull markets when they are occurring. 

What Is a Bear Market Rally?

Bear markets—typically defined as sustained, market-wide downturns of 20% or more as measured by a bellwether stock index like the S&P 500—are a natural part of the investing world. They help bring overvalued stocks back down to earth, and they set the stage for future gains. Just as natural are bear-market rallies: shortlived recoveries of 5% or more that occur during the midst of a bear market before stocks fall to new lows.

Similar to a dead-cat bounce, a bear market rally is a brief period of optimism that drives prices up temporarily before bearish sentiment takes hold once again and capitulation (panic selling) resumes, pushing prices even lower than before. You can think of a bear market rally as a brief upward bounce off of a false (or temporary) market bottom.

Of course, all bear markets eventually come to an end. Any market-wide reversal could mark the beginning of the next bull market, but it could just as easily mark the beginning of a deceptive bear market rally. Unfortunately, the only way to tell is in hindsight.

What Causes Bear Market Rallies?

Bear market rallies (sometimes called “sucker rallies”) are typically the product of bullish sentiment on the part of risk-tolerant investors and traders. After prices have fallen sharply for a period, and panic selling begins to subside, prices may start to stabilize (or at least fall at a slower rate).

At this point, bullish investors who aren’t afraid of taking on some risk may begin to buy back into stocks, hoping to establish a low cost basis in order to maximize future gains. This influx of buy orders can drive prices up temporarily—perhaps for a few days or weeks, and sometimes for over a month—but if the momentum isn’t sufficient (and it usually isn’t the first time around), market-wide concerns about overvaluation can once again begin to startle risk-averse investors, who may sell to avoid additional losses, jumpstarting another wave of bearish selloffs.

Bear Market Rally Examples

Between 2000 and 2020, there were two major bear markets in U.S. equities. One was spurred by the bursting of the dot-com bubble in 2000, and the other was set off by the implosion of the subprime mortgage market in 2007. Each decline was characterized by multiple sucker rallies.

A black, white, and gray graph of the value of the Nasdaq Composite from 1994 to 2005, wherein a peak can be seen at the height of the so-called "dot-com bubble" around early 2000

Above is a graph of the Nasdaq Composite from 2994 to 2005. Between its beginning (early 2000) and end (late 2002) the post-tech-boom bear market saw a number of significant but shortlived rallies. 

2000–2002

When the dot-com bubble began to burst around March of 2000, the market (particularly the tech-heavy Nasdaq Composite Index) declined for over two years before entering bull territory in late 2002. Over the course of this bear market, the Nasdaq Composite saw eight rallies of 15% or more, and the S&P 500 saw eight rallies of 5% or more before the market eventually reached its true bottom in the summer of 2002.

2007–2009

The bear market set into motion by the collapse of the subprime mortgage market lasted from around October 2007 to march 2009. Over the course of these 17 or so months, the S&P fell by around 57%—but not in a straight line. 12 bear market rallies of between 5% and 24% dotted the decline before the market reached its true bottom.

Do Sucker Rallies Occur During All Bear Markets?

Bear market rallies occur during nearly all periods of decline. In fact, every bear market since 1900 has been interrupted by a rally of 5% or more at least once before declining to its true bottom. Most bear markets include multiple relief rallies, and typically, the more severe a bear market is, the longer and more intense its sucker rallies are.

Can You Make Money From Bear Market Rallies?

Since most bear markets include multiple significant rallies, an active trader who timed these rallies perfectly could stand to make a pretty penny. That being said, timing bear market rallies is about as difficult as differentiating them from the beginning of a new bull market, and only very active and experienced traders who can tolerate a lot of risk should attempt to do so.

For the average investor, bear markets and the rallies that accompany them are a normal (albeit stressful) part of the buy-and-hold investing experience, and a passive strategy like dollar-cost averaging can be the best way to lower cost basis and set oneself up for success once the market eventually turns around.