Yahoo Finance: How Bear Market Rallies Trap Dip Buyers and Frustrate Investors

Article by Jared Blikre Yahoo Finance

Bear market rallies are the stuff of legends.

Born through a combination of conditioned dip-buying and or a fear of missing out (FOMO) from investors — the bear market rally's purpose is to maximize investor pain. And these events do it well.

The market lures in new longs, only to eventually send stocks to new lows.

At the beginning of bear market turns, these rallies are flashy and short-lived. As the market grinds lower, these rallies tend to grow bigger, more exciting, and quite deceptive.

During the Financial Crisis, the market head-faked investors with three minor rallies from fall '07 through summer '08 — of 8%, 12%, and then 7%, respectively — suckering in new longs near the 2007 record highs.

And then markets really started messing with investors.

Declines of 45% and 51% from record highs were met with rallies of 18% and 24% in the fall of 2008, moves that came several months before the market's ultimate bottom in March 2009.

Suddenly, headlines were reading: "Stock market 20% off the lows," enticing traumatized investors to possibly pull the trigger on what remained of their cash position — only to see new lows in the coming weeks and months.

S&P 500 — Global Financial Crisis Bear Market Rallies

During the dot-com bubble burst, it took nearly three years for the bear market to finally shake out bagholders from the first tech mania.

The S&P 500 dropped 49% from record highs before hitting its ultimate bottom in late 2002. Over the course of 2001 and 2002, the S&P 500 saw no fewer than four rallies of 19% or more.

It wouldn't be until the spring of 2007 that the benchmark index would reach another record high. Just in time, of course, for the aforementioned Financial Crisis.

S&P 500 — Tech Bubble Crash Bear Market Rallies

Bear markets test investors, both on the way up and way down.

When the news cycle seems like it can't get anymore horrifying, stocks seize an olive branch. Perhaps it is a reprieve from a hawkish central banker or a drop in sky-high oil prices.

But no matter the catalyst, bear market rallies can send stocks off to the races, and weary investors don't want to miss out.

Rinse, repeat!

At its most recent lows, the S&P 500 was ........

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