Beware the Bear Trap Disguised as a Stock Rally

There are many ways to lose money in down markets, and buying fleeting rebounds is among the best. The Nasdaq Composite Index boomeranged 10% last week from its March 14 low, safety-trade gold posted its worst week since June 2021 and money poured into speculative exchange-traded funds including Cathie Wood’s ARK Innovation ETF.

It’s easy to fall for the idea that the worst is behind us. But with war raging in Ukraine and inflation soaring, the coast is far from clear. So was last week the start of another sucker’s rally? History suggests investors should be wary.

Short-term rebounds are common at the start of a down market. In the first couple years of the dot-com bust, I tallied at least eight significant bear market rallies, with three in the first five months.

Likewise, the Great Recession had at least half a dozen significant bear market rallies, half before and half after Lehman Brothers filed for bankruptcy in September 2008. In both markets, the bounces were insidious because they were so varied in size and duration — from a week to several months long — making it impossible to know at the time the difference between a dead-cat bounce and the start of a new bull market.

So is this 2000 all over again, or is there some fundamental reason to believe the market is set to resume its long-term upward trend?