The Dow Jones printed a massive rally on Monday. History shows that big one-day gains are often unsustainable. Analysts see volatility coming.
The Dow Jones just printed its biggest one-day point gain in history. The index rallied by a massive 1,294 points on Monday for a strong 5.1% gain. In terms of percentage gains, this was its best in over a decade.
The surge comes as the markets price in the possibility of a big rate cut this month. Even if the Fed brings out the heavy guns, history tells us that big gains often occur in a bear market. Widely-followed analysts also believe that this rally is your chance to get out of the stock market before the bloodbath resumes.
For the Dow to officially trade in bear territory it must plunge all the way down to 23,600. Even though the index is over 3,000 points above that number, history is not on the side of the bulls.
Investor’s Business Daily revealed that strong one-day rallies are often big bull traps as “bold moves are seldom sustained.” The site put together the nine biggest one-day wonders in the Dow’s history and discovered that big moves up are often followed by a more vicious move down:
In short, history tells us that big surges are not opportunities to buy on dips. Instead, they offer investors the opening to sell on strength before the next round of selling resumes.
While many retail investors celebrate the Dow’s historical rebound, some analysts do not share the optimism and euphoria. Billion-dollar hedge fund manager Will Meade said institutions are exploiting this rebound to get rid of their stock holdings.
The former Goldman Sachs analyst took it a step further and said that the markets face tremendous risks in the form of the presidential election and the coronavirus.
Speaking of the presidential election, economist Alex Kruger believes the market will be volatile for some time as it digests the changing tides in the presidential campaign. When asked if the Dow Jones rally is a big bull trap, he told CCN.com,
Always possible. Particularly so if Sanders comes out of Super Tuesday comfortably ahead. But the tide changed today, as Buttigieg and Klobuchar withdrew from the race and are set to endorse Biden. Sanders odds of winning the nomination crashed. The market will likely remain extremely volatile for a while.
Governments and central banks want prices to hold. Of course, coronavirus infection numbers can toss all of this out the window. These are uncertain times.
Jason Harris of StockHunterTrading.com also believes that a bull trap is in play. He told CCN.com,
Yes it can be a bull trap, if we fail to hold the 200 day moving averages on $SPY and $QQQs. $AAPL and $BA, being big components of the Dow. If Apple sees more downside as they price in the next quarters guidance, then the Dow will fall more. A lot of eyes will be on how fast we can contain the coronavirus in the US now.
Todd Butterfield, owner of the Wyckoff Stock Market Institute, is not so pessimistic. He believes that after this storm, the bull market will resume for another one to two years:
I think we will see sideways to higher and maybe another new low for this move in a month or so. Then, I think the resumption of the bull market for another 1-2 years.
It seems like the Dow is wading through turbulent waters for now. If that’s the case, it may be best for investors to stay on the sidelines until the current calms down.
The above should not be considered trading advice from CCN.com. The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.