If history is any guide, bear markets remain grizzly even after big one-day gains.
After stocks posted one of their biggest rallies ever Wednesday, with the
Dow Jones Industrial Average
surging 6.4%, Ned Davis Research, a market statistical service, looked at 31 bear markets from 1901 to 2001 and found the biggest one-day pops were succeeded by paltry 0.3% gains, on average, the next day.
"You may get big one- or two-day gains, and we have had quite a few of those since March 2000," said Sam Burns, an analyst at Ned Davis. "But they do not mean that the bear market is over." In fact, many of the rallies took place in the middle of a bear market, rather than at the end of it.
A bear market occurs, according to Ned Davis, with a 30% drop on the Dow, a 13% fall on the Dow that lasts 145 days, or a 30% decline on the value-line index, an equally weighted average of 1,700 stocks. The current leg began March 19.
On March 16, 2000, the Dow surged 500 points, or 4.93%, the largest percentage rally of the bear market ending last September, only to shed 0.3% the next day. Going back further, the index rocketed 14.9% on Oct. 6, 1931, during the Great Depression, but fell 2% a day later.
In recent trading, the Dow was off 20 points at 8,171, having risen almost 100 points earlier. The market has been very volatile, making it exceedingly difficult to figure out where stocks will end up.
"Either you will get the big selloff, or you will get two to three days of stability to convince people the market is not going down the tubes," said Tobias Levkovich, senior U.S. equity market strategist at Salomon Smith Barney, who added: "This market has been unbelievably capable of frustrating everyone."
According to Levkovich, there are some fundamental grounds for optimism about the market. "We've had reasons why the market should be rallying," said Levkovich. "One hundred eighty out of 300
companies that have reported earnings for the second quarter have beaten expectations."
The fact that sentiment continues to be negative may be a positive for the market, some said. "Everything that has been written on Thursday suggests this was just a bear market rally," said Peter Blatchford, a trader at Miller Tabak, "which as a contrarian indicator may be a good sign."
Still, experts don't see the market coming back with a vengeance, despite its ferocity on Wednesday.
"If we get a strong rally on Thursday and then a follow-through on Friday, there may be reason to believe that the market has hit bottom," said Richard Dickson, a technical analyst at Hilliard Lyons. "But the misconception is that we get a dramatic reversal and then we are off to the races," said Dickson.
Sam Burns said certain signs in the past have signified a rally's sustainability. They include: Advancers outpacing decliners by 9 to 1, or a ten-day ratio of advancers to decliners of 1.91 or higher.
"Stuff like that can signify a reversal," he said. On Wednesday, advancers beat decliners by 1.5 to 1.