Biggest 3 Day Rally Since 1931

Another Huge Rally

The stock market has been on a rampage. It’s now up about 19% from the trough on March 23rd. Dow is up almost 23% which catalyzed the Wall Street Journal to say a new bull market is here. It's unlikely that 3 days of rapid gains makes a bull market. Even if these were the most rapid gains since 1931. 

It’s stretch to say everything is back to normal when the number of daily cases in America is still rising. Volatility is falling and has probably peaked for the cycle, but let’s not act as if the market is going to hit a new record high in April. We have a long way to go.

S&P 500 was up 6.24%. That’s not a normal day. Let’s see the market go a week without moving more than 2% in either direction and have the number of daily new cases in America start falling before we say everything is back to normal. Usually, there is a retest of the lows or a break of the lows before stocks move higher. 

The decline heading into this big rally was so fierce that still only 3% of the S&P 500 is above its 50 day moving average. Keep in mind that most stocks are trading together. It’s a binary situation. Once the S&P 500 rallies above its 50 day moving average, almost all stocks will be above their 50 day average.

The charts above show the S&P 500 as of March 25th and the prior 2 violent declines in 1929 and 1987. In 1929, the market hit a new low in its retest and in 1987, the market passed its retest. In financial crisis, the S&P 500 fell lower in March 2009, but many stocks and markets maintained their October 2008 lows.

Review Of Sentiment

Many were excited to get an ‘all clear’ sign to buy stocks from the NAAIM exposure index. But stocks rallied on Tuesday and Wednesday, so the index increased. This report comes out every week. So we are left to our own assumptions as to what it would have been if it had been a snapshot of investors’ holdings on Monday instead of Wednesday. Personally, I’m guessing it would have been negative.

As of Wednesday, the index was at 25.87 which increased from 10.65. As you can see from the chart below, active managers became more bullish, but were still very bearish as of March 25th

Surprisingly, the AAII investors sentiment survey got slightly more bearish. Percentage of bears rose 0.9 to 52.1% making this the 3rd straight week it was above 50%. That’s 21.6% above average. Percentage of bears fell 1.4 to 32.9% which is 5.1% below average.

Review Of Markets

On Thursday, the short end of the bond market rallied which put the 1 month, 3 month, and 6 month bills in negative territory. The chart below shows the 6 month bill at -3 basis points. Before you say I was wrong for claiming the short end would stay near zero, recognize that on Friday morning, the sort end sold off sharply. 1 month bill’s yield rose 20 basis points to 16.5 basis points. And I maintain my point that it will stay near zero. Also, I strongly believe the Fed won’t cut rates to below zero. Its not that the Fed can’t do this; it’s that the Fed doesn’t think it will help.  

Nasdaq was up 5.6% and the Russell 2000 was up 6.3%. Remember, the Nasdaq was down slightly on Wednesday. Tech stocks roared back on Thursday. Every sector was up. Tech was up 6.35%; it actually wasn’t even one of the best 5 sectors because of how sharply the market was up. 

Best sector was the utilities which was up 8.39%. Uutilities likely fell last week (and Monday) because there was a complete liquidation of positions. Con-Ed stock fell 29.12% in 3 days and then rose 16.17% in the next 3 days. This type of trading almost never happens. Con-Ed had nothing negative happen to it. It just fell because portfolios in distress needed to raise cash.

Update On Coronavirus

Thursday was a terrible day for Germany, Spain, and America. It wasn’t good for Italy either, but it stayed below its record peak which is good. Only real good news came out of New York City which saw a decline in cases after it had a massive spike on Wednesday.

Let’s start with the good news. In New York City the number of new cases fell from 4,414 to 3,101. That’s great news after the big spike on Wednesday. Prior to Wednesday, there had been a 4 day range where the high end was 2,649. Thursday was above that range, but it wasn’t far away. 

We're looking to see the number of cases start to fall in early April. If the number starts to fall in late March, it would be fantastic news as New York is having a tough time getting enough ventilators for severe patients with COVID-19.

Overall, in America the number of new cases rose from 13,355 to 17,224. We're expecting the number of new cases to fall or not increase much on Friday because Thursday had such a big leap. Number of new daily cases should peak in about 2 weeks.

Italy has the most deaths as there have been 8,215. This is an enormous tragedy that we all hope is near its end. As you can see from the chart below, Thursday wasn’t a good day for Italy. Number of new cases rose from 5,210 to 6,203 which is the 2nd most ever. 

It would be a big defeat if the number hits a new high. Stocks would probably decline on that news. Numbers should be falling because Italy has been in lockdown for over 2 weeks. Lockdowns take about 2 weeks to start showing signs of working in terms of the number of new cases per day.

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2 Comments

  • IndyJeff

    March 28, 2020

    After that massive 3-day rise in 1931 stocks continued higher into late June then dropped over 70% over the next 11+ months. Bulls that are giddy over the massive short-covering rally this week should keep that in mind. There is no guarantee this is the V-bottom they so desperately wish for.

    • Kevin Morgan

      March 29, 2020

      Indeed. Excellent historical analyses by Ciovacco and Miner (using different specific comparison tools) both strongly indicate that deeper lows are coming. This is no 1987 situation. And the unemployment # suggests a depression coming like a freight train light in a tunnel...this counter-trend rally is a GREAT TIME to exit the market in my opinion for all those "investors" who are still holding. My $0.02, I'm not a CTA and my comments are for entertainment and education only..."consult with your financial advisor" (except be aware most such just say "stay in, you'll miss the big moves up". even if/as the market ends up moving down to SP500 at 1900...1300...666??? Buy and hold is foolish when a bear growls).