You’ve consulted history, done the math and gathered the expert advice. Now, here’s really how to tell whether to go all-in on a stock rally that breaks out in the middle of a bear market: guess.
That sobering view is from data compiled by Leuthold Group, which sought ways to distinguish real rallies from fake ones by plotting prices in two dozen lookalike stock runups going back 65 years. The answer is that it remains next to impossible to say in real time which ones will last. Methods people claim work often fall apart when looked at rigorously.
This type of forecasting, in which past precedent is tested and tortured for trading insight, has become Wall Street’s chief pastime of late, with a $7 trillion rebound in US equities tempting people to dive back in. Leuthold’s research suggests much of it is an iffy experiment in pattern recognition that provides grist for discussion but rarely reveals truths.
“I don’t know anyone who really calls the exact bottom consistently,” said Jeffrey Hirsch, chief editor of the “Stock Trader’s Almanac.” “There’s an old joke out there that there’s only one kind of person that calls it exact bottom and top. That’s a liar.”
In testing the view, Leuthold, the Minneapolis-based fund manager, did what a lot of researchers are doing nowadays -- compare the current advance in stocks with previous ones to see if anything can be gleaned about its sustainability.
Starting in mid-June, the S&P 500 is up 17%, erasing about half of its bear market plunge. Leuthold then looked at past rallies that broke out in bear markets, some of which fizzled and some of which became new bulls, at roughly the same point in their evolution. At the two-month threshold, the rallies that faded were a little smaller, with a median gain of 11%, and the ones that kept going were a little faster, taking just seven days to get to 10% (the current one needed 31).
In the end, though, not much in terms of speed or trajectory separated the winners from the false dawns. Drawing a conclusion based on this brand of price action alone is only marginally better than a tossing a coin, says Doug Ramsey, the firm’s chief investment officer.
“The kickoff of a new bull market is a little more powerful, but there are enough exceptions to the rule in terms of the market meandering a bit before getting into that 10% threshold or very sharp bear market rallies that are achieved in just a handful of days,” he said. “You just can’t conclusively look at price action alone to say, ‘No, this is a bear market rally. No, this is a new bull market.’”
The futility rests not just with statistics but psychology and language. When does a rally qualify as being more than just a head fake? Years into the stock advance that began in 2009, it was possible to find people still describing it as a bear market rally -- right up until it ended, in some cases. Things in markets aren’t clear until they’re put in history books, and in some cases not even then.
Forecasting the market is never easy, and this year is no different, given the uncertain path of Federal Reserve tightening and its impact on the economy. The backdrop has led to clashing views on the S&P 500, with the gap in strategists’ highest and lowest year-end target sitting among the widest on record.