Large single-day gains in the stock market, such as the Nasdaq 100’s 3% surge on February 22, should not immediately signal a bull market. It’s crucial to temper the enthusiasm seen on Wall Street after this notable rise, largely driven by Nvidia’s stellar earnings. Contrary to popular belief, significant daily rallies occur more frequently in bear markets.
“To highlight this, I’ve created a chart by analyzing the Nasdaq 100 index’s trading days during bear markets,” explained the analyst. “Determining the precise start and end dates of bear markets relies on the calendar provided by Ned Davis Research.” The chart emphasizes that days with notable gains are more common during bear markets, and this trend intensifies with the size of the rally.
Providing context to the chart, it’s important to mention that 16% of trading days since the Nasdaq 100’s inception in 1985 have occurred during periods classified as bear markets by Ned Davis Research (marked by the red line in the chart).
If significant daily rallies were random, one would expect no more than 16% of them to happen in a bear market. However, data from the past four decades shows that when the Nasdaq 100 experienced a rise of at least 10% in a single day, at least 90% of these instances took place during a bear market.
Even when we lower the threshold to daily rallies of at least 3%, the frequency during bear markets remains three times higher than what one would expect if significant rallies occurred randomly, whether in bull or bear markets.
“These findings remind us not to be overly influenced by market rallies,” the analyst emphasized. “If we solely relied on the magnitude of the recent one-day Nasdaq rally, a cautious conclusion would suggest a higher likelihood that we are either currently in a bear market or about to enter one.”
The increased volatility observed during bear markets significantly contributes to these findings. While many investors understand that the CBOE Volatility Index (VIX) tends to rise during market downturns, there’s a lesser-known aspect: significant rallies are just as impactful in influencing volatility as significant declines.
This nuanced understanding challenges the misconception that periods of heightened volatility are only associated with substantial market declines, underscoring the importance of avoiding oversimplifications.
