What happens to rallies after a big market drawdown? They soon are followed by another slump. That’s the warning from LPL Financial’s Ryan Detrick.
In fact, this second dive typically is around 10%, so it’s not as bad as the initial bearish plunge, wrote Detrick, the firm’s senior market strategist, in a research note. He studied market corrections after bear markets back to the 1950s. And, as brief as it was, the February-March market descent was a bear market, losing 34% (a reduction of 20% off the market high signals a bear market).
Right now, there’s a strong rally from the March 23 market low, with the S&P 500 up 32% in 40 trading days. “Looking back at history shows that after the initial surge off of bear lows, stocks tend to correct about 10%, which is something we could see this time around,” Detrick remarked.
Indeed, the S&P 500 rallied nearly 21% in 30 days, on average, after all major bear markets over the past six decades-plus (actually stretching to 1957), using data from Strategas Research Partners. So at 40 days, we’re overdue.
“Bottoms are a process,” Detrick observed, “and as impressive as this run has been, we think the odds are quite high for some type of pullback or correction over the coming months.”
The best and longest post-bear rally came in 2009, when the market jumped 43% for 67 days before a 9.1% drawdown occurred. The smallest bounce back was 1957’s 7% (over 26 days). The shortest such rally lasted just two days in 1987 (up 15%).
Some headwinds are a-blowing, Detrick said, which are candidates to knock over the current post-bear rally. Namely, high stock valuations, souring US-China relations, weakening technicals, and the onset of summer, when the market normally doesn’t do as well as during the rest of the year. Not to mention the ongoing menace of the coronavirus and the difficulty of restarting a stalled US economy.
These factors, Detrick contended, “all could play a part in potential weakness after the record run.”