Beware the Bear Market Rally

03/25/2020 12:06 pm EST


Adam Button

Co-Owner and Managing Director,

Many of the strongest one-day rallies occurred in the midst of bear markets. It neither signals a bottom nor is necessarily restricted to one day, reports Adam Button.

The Dow Jones Industrial Average jumped 11% -- the most since 1933 to prove the adage that bear-market rallies are the most-powerful.

Global equity markets snapped back in their largest one-day rallies in years. Most of the one-day gains date back to 2008 or 2011 but the Dow Jones Index climbed 11.4% in the biggest single-day gain in since the Great Depression. See what we mean by bear market rallies.

That last tidbit is instructive as there are only a handful of years that have ever had 8% rallies: 1929, 1931, 1932, 1933, 1987 and 2008—see a correlation? None of them marked the bottom. Moreover, the biggest-gaining stocks in the S&P 500 were airlines, casinos and cruise lines; suggesting this was a short-covering rally. In any case, the market still didn't breach Friday's high.

That doesn't mean it will only be a one-day event. Quarter and month-end rebalancing is expected to add 240 billion in equity flows this month and the equivalent among of bond selling. Given the extreme volumes trading right now, that's not a high amount but climbing yields Tuesday indicate it might be a factor.

On the fundamental side, the Markit services PMIs were generally poor. U.S. and German manufacturing numbers were surprisingly strong but that won't last.

The more important numbers are on the virus. Italian cases are showing some signs of stability, but the epicenter is moving to New York state where cases rose to 25,600 from 20,900 a day earlier. One-in-three tests are resulting in a positive and that's higher than anywhere testing en masse. Given the trajectory, New York is likely to surpass Wuhan's case number in a week. Governor Cuomo said the best-case scenario was a peak in 14-21 days.

Numbers elsewhere are also beginning to jump.

In forex, USD/JPY edged to a one-month high of 111.71 but is losing momentum ahead of the February high of 112.23.

The Australian dollar (AUD) was the top performer while the yen lagged. USD/JPY continues to close in on the February high. Gold extends its gains on a powerful combination of miners’ shutdown and Fed's historic QE trigger. 

USD/JPY has been a tough trade for the past five-weeks, defying the usual correlations and confounding traders. At some point the demand for USD liquidity will fade and the market will trade on the economic impacts, but the timing is a difficult call. Whether the February high holds or sparks a further squeeze and USD super-spike will be telling.

Adam Button is co-owner and managing director of and a contributor at You can see Ashraf’s daily analysis at and sign up for the Premium Insights. Ashraf's Tweet on indices here.

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