Alternate names: sucker’s rally, bull trap, dead cat bounce
The most recent example of a bear market rally took place in 2020. The S&P 500 Index dropped more than 20% between Feb. 20 and March 12, closing at 2,480.64 and officially entering a bear market. The next day, the index rose 9%, but those investors who jumped back in were suckered when the index sank to 2,237.40 just 10 days later, wiping out the gains as the market continued to head down. The Dow Jones Industrial Average also closed at a high in February 2020, but it didn’t last long. As soon as the coronavirus pandemic was declared a national emergency, the Dow saw its three worst single-day point losses in U.S. history. The March 2020 drops officially ended an 11-year bull market:
March 16: Down 2,997.1 pointsMarch 12: Down 2,352.6 pointsMarch 9: Down 2013.76 points
After the March 9 drop, the Dow rose almost 5% on March 10. However, by March 11, the Dow closed down again at 23,553.22—a 20.3% drop from the Feb. 12 high of 29,551.42. By March 23, the Dow had fallen to the year’s low of 18,591.93. Luckily, by the end of 2020, the Dow was reaching new record highs.
What a Bear Market Rally Means for Individual Investors
A bear market is a period when stock market prices decline by 20% or more for at least a two-month period. During this time, prices can start to climb before dropping back down. This is a bear market rally where a gain is followed by subsequent losses until the bear market bottoms out. Like any other market movement, a bear market rally can be an opportunity to make—or lose—money.
Take a Short Position
A bear market rally provides day traders a chance to profit by shorting stocks, a complex strategy that may not be for beginner investors.
Try Dollar-Cost Averaging
Long-term investors who are making regular additions to their accounts—especially retirement accounts—should celebrate a bear market rally since it indicates stock prices are headed lower for a while longer. People using the dollar-cost-averaging approach can buy more shares at cheaper prices until the market bottoms out. Over time, this lowers the average price of the stocks they own.
Avoid Emotional Investing
Jumping on rallying stock market prices just because you fear missing out on a market bottom is a symptom of emotional investing, which can guarantee a loss. Investors with established strategies and diversified portfolios should ignore anything that looks like the start of a sucker’s rally, stick with their long-term plans, and avoid taking a hit.
It Likely Won’t Last Forever
A bear market rally indicates that the downturn is going through the natural cycle. It also can indicate that other investors who’ve been frustrated waiting for a rally finally will give up and sell, sending prices on the way to the cycle’s eventual low and recovery. Bear markets have historically climbed back above the levels of their bear market rallies, such as with the Dow in 2020. By December, the Dow was reaching new record highs despite the 20% drop earlier in the year. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
