Price spikes happen in bear markets more often than in bull markets
Stocks post huge one-day gains more often during bear markets than during bull markets. Keep that in mind as you digest the U.S. market's impressive rally on Jan. 15, in the wake of what investors evidently considered the good news embedded in the latest U.S. inflation news.
The tech-heavy Nasdaq Composite Index COMP in particular spiked 2.5% in this latest surge, which many believe proves that the bull market is back on track after a five-week pause that began in early December.
That interpretation is not supported by the data. A disproportionate share of past one-day spikes took place when the stock market's major trend was down. So if the only piece of evidence you had was the fact of Jan. 15th's big rally, you'd have to bet that we're in a bear market.
Consider what I found upon analyzing the Nasdaq going back to its creation in 1971. To determine if any given day occurred in a bull or bear market, I relied on the calendar maintained by Ned Davis Research. It turns out that, on average, one out of four days over the last 50-plus years has been in one of these major bear markets.
So if big one-day rallies occurred randomly throughout the calendar, you'd expect just 25% of them to take place in bear markets. And if big one-day rallies were evidence of a bull market, then you'd expect far less than 25% of those rallies to occur during bear markets.
That is not the case, as you can see from the chart above. Among the 25 biggest one-day rallies since 1971, 80% have occurred during bear markets. Among the 100 biggest rallies, 61% have occurred during bear markets.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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-Mark Hulbert
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