Wednesday, March 11, 2009

Yesterday Was Just A Bear Market Rally

Don't fall for yesterday's market recovery, it was just a bear market rally. These bear market rallies should be expected, Kathy Lien points out in her blog post below. In addition Lien explains how the dollar might be impacted by these rallies.

Stocks rallied significantly yesterday, leading many people to wonder if this is “the bottom” in equities. Given that none of the problems in the U.S. economy have been resolved, I think that this is a bear market rally.

With that in mind, it is interesting to look at how much equities could rebound in a bear market rally. The best analog for the economy today is the Great Depression. Therefore I’ve pulled up the chart of the S&P during the Great Depression. The index fell as much as 86.5 percent before it finally bottomed. The sell-off was not without relief rallies. Between 1929 and 1932, there was 6 “bear market rallies” that ranged from 12 to 110 percent. The S&P was trading at much lower levels then but on a percentage basis, bear market rallies usually extend 25 percent. With that in mind, since the S&P 500 bottomed out on Friday, the index is up close to 8 percent. A 25 percent move would put the index at 833.

How does this relate to currencies? Further gains in U.S. equities would mean further strength for the EUR/USD. So if the S&P 500 hit 833, the EUR/USD could break 1.30.

Click on the chart to enlarge

Bloomberg Chart

Source: Bloomberg

This post can also be viewed on kathylien.com.

Labels: , , ,

Subscribe to NuWire's free weekly investment newsletter:
  
Your information will not be shared

0 comments:

Post a Comment

Home

© 2013 NuWire Investor and NuWire, Inc. All Rights Reserved.