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what is a relief rally

However, it can be risky as the overall market trend might still be negative, and the relief rally could be short-lived. A relief rally can often be temporary, and should not be seen as an assurance of a long-term upward trend. It’s essential to view them in the broader context of the market’s overall performance. There are many more examples of potential relief rallies now going on with many well-known, name brand stocks. Institutional investors (and traders) will be looking to the CPI and PPI numbers to be released later this month to gauge how much further the Fed might go with interest rate hikes. Declines large enough to qualify as bear markets often take place as a result of deteriorating fundamentals, whether the ultimate cause is a housing market crash, a pandemic, or merely a recession.

This is most times a response to a piece of positive news following a somber mood cast by events such as a bearish run or negative economic indicators. Perhaps the company released a better-than-expected earnings report or there’s been a significant development within the industry or the wider economy. This provides an opportunity for investors to strategize their investments, possibly purchasing assets at lower prices to benefit from the impending upward swing. On the other hand, a relief rally can provide an exit opportunity for those looking to cut their losses or secure their profits.

what is a relief rally

A relief rally often happens amid a secular decline in the market or persistent selling pressure that lasts for multiple days. Slightly better-than-expected financial results sometimes ignite relief rallies for beaten-down stocks with a long history of missing analysts’ expectations for many quarters. Slightly better-than-expected financial results sometimes ignite relief rallies for beaten-down stocks with a long history of missing analyst expectations for many quarters.

What Is a Rally?

Relief rallies occur in various asset classes like stocks, bonds, and commodities. Bear market rally refers to a sharp, short-term rebound in share prices amid a longer-term bear market decline. Bear market rallies are treacherous for investors who mistakenly come to believe they mark the end of an extended downturn. As the primary bearish trend reasserts itself, the disappointment of those who bought during a bear market rally helps to drive prices to new lows. Sharp relief rallies that occur in otherwise bearish markets are sometimes called a dead cat bounce or sucker’s rally. This type of rally may fool some into thinking there is a reversal in the trend, only to find the bear market continuing soon after.

  1. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
  2. On the other hand, a relief rally might potentially be the start of a new upward trend, although this is not assured.
  3. However, a rally will typically follow a period of flat or declining prices.
  4. As with a bear market, there is no official definition for a bear market rally.

This type of rally might fool some into thinking there is a reversal in the trend, just to find the bear market continuing before long. A relief rally is a respite from market selling pressure that results in an increase in securities prices. Sometimes it happens when expected negative news ends up being positive, or it’s less severe than expected. After stocks sell off and make a new low, some buyers come back in and provide support for a few days, sometimes a few weeks. That’s a relief rally and it’s usually identifiable by its failure to reassert price back above downtrend lines. A confirming factor (sometimes) is the diminishing of volume as the upward move unfolds.

What Is a Bear Market Rally?

This rally generally happens when there is positive news following a period of negative sentiment or market downturn, leading to increased investor confidence and a boost in trading activities. The relevance of understanding a relief rally lies in its potential to offer lucrative short-term trading opportunities and it also serves as a key indicator of shifting market trends. However, it’s critical for investors to be cautious, as these rallies can be temporary if they are driven by speculative trading rather than fundamental improvements in the economy. A relief rally frequently occurs in the midst of a secular decline in the market or determined selling pressure that lasts for numerous days. Somewhat surprisingly good financial outcomes at times light relief rallies for pummeled stocks with a long history of missing analyst expectations for some quarters.

Relief rallies in these very bearish markets are sometimes called a dead-cat bounce. This type of relief rally happens when there’s a temporary recovery from a bear market or lengthy decline, but then the downtrend continues later. A Relief Rally is an important business/finance term as it denotes a significant increase in market prices that occurs after a period of decline or uncertainty.

The deepest bear markets have in the past produced the biggest bear market rallies. In the aftermath of the Stock Market Crash of 1929, the Dow Jones Industrial Average went on to rebound 48% from mid-November through mid-April of 1930. From there, the Dow declined 86% by the time the bear market hit rock bottom in 1932.

As a relief rally example, stocks tumbled in August 2015, amid concerns about an economic slowdown in China, at the time the world’s second-largest economy. A devaluation of China’s currency also weighed on global markets, as many feared the slowdown could spread to the U.S. Market participants price in many different types of events, in addition to corporate earnings. Examples include election results, policy interest rate changes by the U.S Federal Reserve and new industry regulations. Any of these events can trigger a relief rally when the news is not so bad, relative to widespread negative expectations. Much of the time, such a rally can last for quite a long time or even months before the continuation of a longer-term descending trend.

As these risk-tolerant buyers acquire stocks from the risk-averse sellers getting out at new lows, a relief rally often follows, lasting from a few days to several months. A bear market is commonly defined as a stock market decline of 20% or more. At some point during the downturn, an orderly retreat typically turns into high-volume panic selling. Bargain hunters grow convinced capitulation is at hand, signifying at least a short-term market bottom. Since bear markets last for long periods of time, they can correct an emotional drain on investors expecting a market circle back — consequently the “relief” when indications of a bounce show up. Market advisors caution against emotional reactions to market volatility, as investors might panic and make judgment errors with respect to their holdings.

what is a relief rally

Sucker rallies often occur during a bear market, where rallies are short-lived. Sucker rallies occur in all markets, and can also be unsupported (based on hype, not substance) rallies which are quickly reversed. A rally is a period of sustained increases in the prices of stocks, bonds, or related indexes.

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A rally usually involves rapid or substantial upside moves over a relatively short period of time. This type of price movement can happen during either a bull or a bear market, when it is known as either a bull market rally or a bear market rally, respectively. However, a rally will typically follow a period of flat or declining prices. More recently, stock market volatility increased in February 2018, amid rising geopolitical tension between the U.S. and North Korea, as well as uncertainty regarding U.S. trade policy. Markets also grew wary about rising bond yields with 10-year Treasury yields briefly reaching 3 percent for the first time in years.

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Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

Sucker rallies are easy to identify in hindsight, yet in the moment they are harder to see. As prices fall, more and more investors assume that the next rally will mean the end of the downtrend. Eventually, the downtrend will end (in most cases), but identifying which rally turns into an uptrend, and not a sucker rally, is not always easy. A rally may be contrasted with a correction or market crash, which is a rapid or substantial downward move in short-term prices. Rallies of 10% or more interrupted two-thirds of the 21 bear markets over that span.

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