Market Behavior: Bear Market Rally

June 21, 2022, 11:58 am EDT

Bear Market Rally

A bear market rally or bear market rebound occurs after the sell-off in a major downtrend. A short-term rally is formed by short-cover, small traders buying the dips, and an oversold bounce. Due to the lack of fundamental changes and commitment of institutional investors, this rally will be short-term. More importantly, exhaustion of the rebound power, the major indexes are going to fall further to a new low. 

The reason is simple. The stock markets consist of two major types of market participants: long-term vs short-term and institutional investors vs retail traders. Here is the composition:

  • Long-term, institutional investors: 75%
  • Short-term, retail traders: 25%

Long-term investors look for economic data to decide to buy or sell. It includes interest rates, GDP, inflation, consumer sentiment, jobs, housing, etc. Short-term traders depend on daily news, short-term chart, and trading physiology to make a trading decision. Therefore, when we know the big picture is going down because of rising rates, higher inflation, balance sheet reduction, and loss of sentiment that the trend is on the downside. Any rebound or rally is set to fail. 

Therefore, understanding the difference between major trends and counter-trends will help us to stay alert and not be confused by its behavior only.

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