Episode Details

We’ve seen incredible rallies across the board this week.

After a worrying sell-off late in the day and into the close on Friday, the Dow and S&P500 all both took off on Monday, rallying by over 3%. They then followed through with gains of another 3% on Tuesday.

The Nasdaq was up by even more.

Given that tech was so totally beaten up, I guess the bigger rally is no surprise. 

You could apply the same logic to precious metals. Silver, sold down into the abyss, rose by eight and a half percent on Monday. The call for a multi-week rally in silver is looking good.

Even the once internationally sought-after currency that is sterling has seen a barnstormer. 

A week ago everyone was talking about parity with the US dollar. It was all over the headlines (which usually means it’s time to take the other side of the trade). Even Turkey’s President Erdogan, with a display of hypocritical chutzpah that would capture the admiration of even the most duplicitous of tyrants, was deriding it. It has “blown up”, he said. He’s not been looking in the forex mirror lately at his own lira, it seems.

Sterling went from $1.03 almost to $1.15.

What we’re looking at is a typical short squeeze

I want this bear market over as much as you probably do, and I hate to go all prophet of doom on you, but these kinds of rip roaring rebounds are just that: rebounds. They are not so typical of bull markets.

Let me give you some depressing stats. 1929, 1931, 1932 and 1933 were among the worst years of in US stockmarket history. Famously so. Yet, on a percentage basis, the ten biggest rallies in the Dow Jones Industrial Average i n the first half of the 20th century all took place in those years.

Prior to this decade, the best days in the stockmarket since 1950 were, says JC Parets of All Star Charts, in 1987, 2002, 2008 & 2009. Again, 2009 aside, not a great time to buy stocks.

These kinds of spikes are not typical of bull markets. That’s not to say they don’t happen in bull markets, but they are more typical of bear markets. Bull markets tend to grind higher. Increased volatility, heightened fear and risk, big up days and big down days, short squeezes: these are all things you see in bear markets.

Indeed, it’s a typical short squeeze. There have been lots of sellers. There are lots of people with big bets that prices will continue falling – a lot of shorts – and suddenly there are no more sellers in this crowded market. As the price turns, the shorts quickly cover their positions – which means there are suddenly lots of buyers – and the market rockets higher. It’s the sudden and rapid covering of positions that causes the spike up.

Of course, sometimes you get these spikes at the final low. March 2009 was one example. March 2020, at the height of the Corona panic, was another. The problem is that on the way to that final low there have been many such up days and down days, so, in real time, you don’t actually know which this is the final one.

“From false moves come fast moves in the opposite direction” is a phrase you may have heard me utter on these pages several times. Friday’s move down was one such example. A break down to new lows, below the June lows, everyone thinks we are going lower. Rumours are flying about. There’s an emergency meeting of the Federal Reserve Bank on Monday. Credit Suisse is going under. The implications of this are bigger than Lehman in 2008. 

Then the market turns around and rips everybody’s faces off.

Rip-roaring up-days are are normal for bear markets

As I write now, most markets have turned down again – though at present it looks more like consolidation action after the gains of the last couple of days.

Here’s the S&P500 over the past year. Just loo