Bull rallies in bear markets

Bull rallies in bear markets
Vinod K Sharma / New Delhi July 5, 2008, 0:11 IST

On Wednesday, the Sensex produced a 703 point rally. A massive 5.43 per cent rise in a single day. Stocks were bought as if there was no tomorrow. Media, analysts and investors declared that a bear market bottom had been made at 12822 in the Index and 3848 in the Nifty.

That made us go back to our study tables and dust off the older charts in the archive. A cursory look at these vintage drawings validated our initial hunch that bear markets don't end with skyscrapers at their bottom. We found muted rise of around 2 per cent or less in most places.

But it is very much in the realm of possibility to see large bull rallies within the broader parameters of a bear market. Sounds unbelievable but it is true. The normal belief is that bull markets would have more bull rallies and the magnitude of such rises would be higher. One would logically expect bull rallies in bear markets to be tame and less frequent. Many a times, this isn't so.

We looked at all the bulls and bear markets that we have had so far, right form the 1991-92 Harshad Mehta rally to the current one. We could have counted rallies in point terms but that would have been harsh on the 1991-92 bull phase when the index was sub 700.

There is no way it could have produced a 100 point rally in the early phase. The second option was counting in percentage terms. We thought a 2 per cent rise was a good rally. But doing so we found that even a 15 point rise was giving a 2 per cent rise because of the initial low level.

So we decided to weed out the 1991-92 bull phase and the bear phase that followed that. As the current bear phase is only in its sixth month, any comparisons with the bull phase that lasted nearly five years from April 2003 would have been inappropriate.

So the bull rally of 2003-2008 and the 2008 bear phases are out. We were left with three bull and their subsequent bear phases, which are described in the table below, along with their findings.

We start with a null hypothesis that the number of bull rallies should be more in bull markets as compared to bear markets of an equal duration. We don't have control over the length of these phases so we took them as it is.

While in the 1993-94 bull market, we had 49 instances of markets rising more than 2 per cent, in the bear phase that followed, we had 28 instances of similar rise. In the subsequent 1996-97 and 1999-2000 rallies and their subsequent bear phases, we had more bullish rallies in the bearish phases, which proves the null hypothesis wrong and proves that bear markets have more bullish rallies. BULL MARKETS BEAR MARKETS PERIOD INSTANCES OF >2% RISE PERIOD INSTANCES OF >2% RISE 1993-94 49 1994-96 28 1996-97 16 1997-98 35 1999-2000 45 2000-01 47

So don't conclude that a bull market has begun merely because you have had a 700 point rally on a given date. Within the folds of a bear market, it is possible to see large retracements from intermediate bottoms. So don't jump every time the market pulls up from a low and ask, whether this was the bottom?

I remember a trek during my school days. We were trekking from Govindghat to Ghangaria en route to Hemkund Sahib and the Valley of Flowers. After the initial 10 km, the trek became arduous and I kept asking our teacher how much more we had to go? After a few times, he got fed up and said, "You will know when we are there."