Definition and Examples of Stock Market Rally
How Stock Market Rally Works
What Stock Market Rally Means for Investors
Definition and Examples of Stock Market Rally
A stock market rally refers to a broad increase in stock prices. A stock market rally can occur during a bull market or a bear market. During a bear market, it’s referred to as a bear market rally, which indicates a temporary increase in a market that is continually declining. Stock market rallies often occur after a significant drop in the stock market, such as crashes. If you are a long-term investor, do not try to time the market and predict rallies. Do not overreact when the market declines. In fact, this may be the right time to put extra cash to work, as history shows that buying when stocks are down can lead to participating in the next stock market rally.
How Stock Market Rally Works
In a bull market or even during a regular trading day, you often hear about stock market rallies in the news headlines or on television. Although there is no specific standard that defines a rally, as is the case in an official classification of bear or bull markets, it usually manifests as a steep and often intense rise in stock prices. Not all rallies are good for traders and investors. For example, we often see failed rallies occur when buyers attempt to trigger a rally by purchasing stocks but fail to achieve it. The term “dead cat bounce” generally refers to a failed attempt at a rally followed by a sharp and sudden drop in stock prices, ultimately losing momentum and turning into another bearish momentum in stocks. Failed rallies can occur over minutes, hours, or longer periods. This is similar to a “sucker rally,” which tends to develop during a bear market. Things are bad, but a stock, sector, or broad index shows signs of life. They start to gain in price, but optimism fades shortly thereafter. The stock or index quickly resumes its decline, leaving buyers with lost value. Hence, the term sucker rally.
What Stock Market Rally Means for Investors
More than anything else, this review of stock market rallies should reinforce the principle of long-term investing. Do not try to time the stock market. Be strategic. Put extra cash to work. Just don’t try to time the bottom or the top or the right moment to join a rally. Stay away from the present and think about how chaotic events like the stock market decline of 1997 can be when they happen. Recently, think about March 2020. The stock market collapsed over four days that month, with the Dow losing more than 6000 points, a loss estimated at around 26%. It’s difficult, if not impossible, to navigate such large fluctuations, even if you are a skilled trader. If you are a long-term investor, there is no real reason to do so.
Note: It is an attempt to predict when the next rally will happen and its duration. The same applies to larger events, such as bull or bear markets. So, the best thing you can do if you have invested for long-term goals, such as retirement, is to stick to any long-term strategy you are using. If you are dollar-cost averaging, which simply means buying stocks over time at regular intervals, you will buy more shares when prices drop and less when prices rise. You will operate from a position of strength if you can enhance this strategy with favorable purchases when opportunities arise.
Often
What follows the rises in the stock market are declines in the market. For example, after reaching a bottom on March 23, 2020, all major market indices rose significantly over the following 12 months, with the Dow Jones rising by 53%, the S&P 500 gaining 58%, and the Nasdaq Composite increasing by 80%. After the market crashes in October 1987, October 1997, August 1998, April 2000, and October 2008, stocks surged significantly in the days following each decline. This has led researchers at Rowan University in New Jersey to note:
“We document a consistent pattern of investor overreaction in a large cross-sectional sample across five of the largest stock market crashes in the past three decades. … “Stocks that lose more value in crashes tend to gain more value after the crash with a significant market correction in the market reversal following the crash.”
In other words, when the market approaches a bottom (a bottom you won’t be able to predict accurately), do not overreact. Stay steady. If you can, add to your positions. History shows that this strategy can provide you with the best opportunity to participate in a stock market rise.
A stock market rise means different things to different people. It all depends on your goals and context. A day trader who wakes up to a strong market opening might succeed by participating in such a rise, even if it lasts only an hour. But perhaps most long-term investors shouldn’t pay much attention.
Source: https://www.thebalancemoney.com/what-is-a-stock-market-rally-5208687
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