Understanding Stock Market Gains

Putting One-Day Rallies into Perspective

One-Day Gain vs. Bull Market

While one-day stock market gains, like the Nasdaq 100’s 3% rally on Feb. 22, can be exciting, they do not necessarily signal the beginning of a bull market. It’s crucial to maintain a realistic view of market exuberance, especially following big gains sparked by events like Nvidia’s blockbuster earnings report.

The Reality of Bear Markets

The Frequency of Big Daily Rallies

Contrary to common belief, significant daily rallies occur more frequently during bear markets. The chart below illustrates this trend by analyzing the percentage of Nasdaq 100 index (NDX) trading days within bear markets.

Analyzing the Data

Impact of Bear Markets on Daily Rallies

The chart demonstrates that days with substantial gains are more common during bear markets, with the frequency increasing alongside the size of the rally. In fact, a noteworthy 90% of trading days with gains exceeding 10% have taken place during bear markets over the past forty years.

Put into Context

Bear Markets vs. Market Activity

When considering that only 16% of trading days since the inception of the Nasdaq 100 in 1985 have been classified within a bear market according to Ned Davis Research, it becomes evident that big daily rallies do not always align with bullish market conditions.

Bear Market Frequency and Rally Thresholds

When we hone in on daily rallies of at least 3%, the bear-market frequency diminishes. However, the data shows that even with these thresholds, bear markets occur three times more often than expected if big rallies were random occurrences during both bull and bear markets.

The Importance of Not Getting Carried Away by Rallies

These findings serve as a crucial reminder to not get swept up by rallies. Relying solely on the magnitude of the Nasdaq’s recent one-day rally could lead one to believe that there is a high likelihood of either being in or nearing a bear market.

Volatility Trends in Bear Markets

It is evident that bear markets are associated with increased volatility. While many investors are aware of the CBOE Volatility Index VIX rising during market declines, it is important to note that significant rallies are equally impactful on volatility. Therefore, assuming that high volatility only accompanies market drops is a common misconception that investors should avoid.

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