Relief Rally: Market Bottom or Head Fake?

Chart of S&P 500 (SPX) Relief Rally
Chart of S&P 500 (SPX) Relief Rally – Source: TradingView

See that big green candlestick on the hard right edge of the S&P 500 (SPX) chart above? That’s what’s called a one-day relief rally. But more than that, you could probably call it the mother of all relief rallies. Or, you could also say it’s a belated Santa Claus rally. Whatever you want to call it, though, it was pretty damn big.

Markets Roar Back

The markets came back with a vengeance on Wednesday after having been in a virtual state of free-fall for most of December thus far. The Dow Jones Industrial Average (DJIA, or Dow) rallied more than 1,000 points, its largest one-day gain in history. The Dow, S&P 500, and small-cap Russell 2000 all rose just short of 5%, and the Nasdaq Composite rallied almost 6%. Needless to say, that’s pretty big for just one day.

True Bottom or False Hope?

So, should we all be cheering this market rebound from what previously looked like a bottomless pit? Or was this just a short-lived blip that’s given investors a solid dose of false hope? In other words, has the market really bottomed, or was Wednesday just a very deceptive head fake? And should we all start piling back into the stock market, or should we wait it out to see if this rally has some real legs?

All good questions, but let’s first put a little context around it. Prior to Wednesday’s sharp relief rally, the S&P 500 had just entered into a bear market, having dropped 20% or more below its most recent peak. In December alone, the S&P 500 had dropped a whopping 16% before the relief rally. Furthermore, in early December, the benchmark index entered into a ‘death cross,’ an exceptionally bearish technical analysis pattern where the 50-day moving average crosses below the 200-day moving average. This provided even more fuel to the sell-off. Therefore, while Wednesday’s 5% rally is indeed something to be happy about, it doesn’t make a very substantial dent in the massive plunge of the past few months.

Investment Time Frame

At the end of the day, though, it pretty much all comes down to your investing/trading time frame. If you’re a day trader or other type of short-term trader, you’ve likely been chopped up recently. Unless, that is, you’ve been short stocks or ETFs for most of this time period. But if you weren’t that smart (or lucky), the past few months have probably been rough, to say the least.

Patience Pays

But what if you’re a long-term investor? Chances are, you may have been buying the market at intervals on the way down. If this is the case, whether Wednesday’s big relief rally was a true market bottom or just a simple head fake is largely irrelevant. For longer-term investors, such things as market pullbacks, corrections, and even plunges, can often be seen as gifts. They provide good – and sometimes great – entries into the market that are often hard to come by.

Could the market go even lower? Of course it can. But if you have just a bit of confidence that the stock market won’t go to zero any time soon and the world won’t end tomorrow, think of the current decline as a potentially excellent opportunity to get into longer-term market positions.

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IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors. 

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

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