Very timely research out of Bank of America yesterday warning that Bear Trap Rallies of 10% or more are very common during the run of a Bear market. (These rallies are dubbed Bear Traps because the gains in stocks encourage investors and traders to buy at higher prices in fear of missing the rally and then facing tough decision to sell when the Bear market resumes.)
And don’t mean that the Bear Market is over or nearing the end of its run.
Yesterday’s 1.2% gain in the Standard & Poor’s 500 was the index’s ninth gain in 11 trading sessions.
Today, March 30, however, the market was again in decline with the S&P 500 closing down 0.63%; the Dow Jones Industrial Average off 0.19%; the NASDAQ Composite losing 1.21%; and the small cap Russell 2000 lower by 1.97%.
The strategists at Bank of America caution that sharp rallies are typical of volatility in bear markets, with some of the biggest on record occurring in the during the Dot-com Bear and the global financial crisis. But 10-day stretches of big gains have been common in bear markets. There were four that exceeded the 10-day rally of 10% through Monday in 11 bear markets since 1927, the BofA strategists wrote.
“The worsening macro backdrop and market-unfriendly Fed make sustained U.S. equity gains unlikely,” strategists wrote. The Fed isn’t likely to come to the market’s rescue at any point and, in fact, the central bank is welcoming of tighter financial conditions to aid its battle against inflation. “In practice, this means lower risk assets.”
Bank of America’s strategists said it would take lower inflation for stocks to be able to add to the latest gains–something the bank’s economists don’t expect. They also warned that any easing of tensions in eastern Europe would remove a threat to growth but also give the Fed cover to hike faster.
