How Bear Markets Fool Gullible Investors

Bear markets like to trick you into thinking they’ve come to an end.

They do this by organizing one-day explosive rallies. These jumps most often turn out to be traps that lure the gullible into the market just when it is about to drop again. Bear markets constantly play Lucy versus Charlie Brown of investors, promising not to pull the ball out just when you’re about to throw it, and then do just that.

This buying high and selling low behavior is why many investors perform even worse than index funds during major declines. Today, with major market averages at risk of slipping into official bearish territory, understanding this mischievous behavior by Mr. Market is more important than ever.

Consider the top 100 one-day rallies ridden by the S&P 500 SPX,
since 1928. You would be excused for thinking that such gatherings are more likely to occur during bull markets. Alternatively, you might believe that such rallies happen randomly in both bull and bear markets. The last thing you suspect is that these large one-day gatherings are more likely to happen during bear markets.

Yet this is precisely the case.

To appreciate what my analysis found, keep in mind that 30.3% of trading days since 1928 have occurred during a bear market in the calendar maintained by Ned Davis Research. So if the top 100 one-day rallies were more likely to occur during bull markets, you would expect less than 30 of them to occur when the main trend was down. In fact, however, 58 of those 100 biggest one-day rallies occurred during bear markets, as you can see in the attached chart. In other words, the likelihood of a big one-day rally occurring during a bear market is almost twice as high as you would expect based on chance.

Moreover, as the chart also shows, the probability of a big daily jump occurring during a bear market is almost as high as the probability of a big daily dip.


I was prompted to carry out this analysis by a fascinating report from Cornell Capital in the bear market concentration of the biggest rallies in the Nasdaq Composite COMP index,
This concentration is even more pronounced than for the S&P 500.

What Cornell Capital has done is focus only on the last three bear markets: the bursting of the dot-com bubble in 2000-2002, the global financial crisis of 2007-2009, and the early 2020 bear market that accompanied the onset of the COVID-19 pandemic. Of all trading days since the Nasdaq Composite Index’s inception in 1971, only 7.8% has occurred during one of these three bear markets.

Nevertheless, an incredible 80% of the Nasdaq Composite’s forty largest one-day rallies have occurred during one of these three bear markets. That’s almost 10 times the percentage you’d expect if these rallies were happening randomly.

The investment implication? Big daily stock market rallies often don’t mean what you think they do. So don’t base any major changes in your portfolio on these bounces.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be reached at