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The Dow Is Surging – That’s Terrible News for Stock Market Bulls

Last Updated September 23, 2020 1:48 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:48 PM
  • The Dow Jones is surging toward a gain of more than 1,000 points on Monday.
  • Investors are cheering the rally, but today’s move doesn’t mean the stock market has found a bottom.
  • In fact, history suggests the opposite.

The Dow Jones Industrial Average (DJIA) surged to mammoth gains on Monday, inciting another round of speculation about whether the stock market had already found a bottom.

Yet if history’s a reliable guide, then the only thing today’s rally signals is that the stock market meltdown probably isn’t over yet.

That might sound counterintuitive. But the truth is that meteoric stock market rallies often evaporate just as quickly , while Wall Street’s most “aggressive” bull runs look astonishingly boring on a day-to-day basis.

Why Investors Shouldn’t Trust Meteoric Dow Jones Rallies

dow jones industrial average chart
The Dow Jones is surging toward a historic gain. Unfortunately, that might not be great news for investors. | Source: Yahoo Finance 

During the 2008 stock market crash, the Dow Jones recorded two of its best days in history, rising 11.08% on October 13 and 10.88% on October 28.

But the bottom wasn’t in. The Dow would ultimately crash another 28% before finally hitting its bear market low in March 2009.

Stocks Rally Harder in Down Years

Conversely, the S&P 500 rose 19.42% in 2017, despite never climbing more than 1.37% in a single session. Over the entire year, the index only had eight daily moves of 1% . Contrast that with the market’s recent performance, which has seen the S&P 500 fluctuate more than 1% in 25 of the last 26 sessions  dating back to March 2.

OK, 2017 may have been an unusually calm year on Wall Street, but it’s not that extraordinary. The stock market rose in seven of the past ten years , and the S&P 500 never secured a daily return  of more than 4.4% in any of them.

Most years never saw the S&P 500 rise more than 2.5% in a single session:

  • 2019 – Annual Return: 28.88% (Biggest Gain: 3.43%)
  • 2017 – Annual Return: 19.42% (Biggest Gain: 1.37%)
  • 2016 – Annual Return: 9.54% (Biggest Gain: 2.48%)
  • 2014 – Annual Return: 11.39% (Biggest Gain: 2.4%)
  • 2013 – Annual Return: 29.6% (Biggest Gain: 2.54%)
  • 2012 – Annual Return: 13.41% (Biggest Gain: 2.49%)
  • 2010 – Annual Return: 12.78% (Biggest Gain: 4.4%)

As for the stock market’s three down years during the past decade? They all featured single-day rallies that were much more aggressive than the S&P 500 encountered during all but the most volatile “up years.”

  • 2018 – Annual Return: -6.24% (Biggest Gain: 4.96%)
  • 2015 – Annual Return: -0.73% (Biggest Gain: 3.9%)
  • 2011 – Annual Return: 0.00% (Biggest Gain: 4.74%)

The Dow’s Best Days Have Come Before Bear Markets Have Found a Bottom

Even more telling is when the stock market has recorded its best days.

Stock market bulls looking for a glimmer of hope can point to March 23, 2009, when the S&P 500 rocketed 7.08% higher two weeks after bottoming out on March 9. The index ultimately closed the year with a 23.45% gain.

But that timing is an outlier, especially when you consider the bull traps that punished investors just five months earlier.

dow jones industrial average biggest one-day rallies ever
Almost all of the Dow Jones’ biggest one-day rallies have come before the stock market has reached the bottom of a bear cycle. | Source: S&P Dow Jones Indices 

The Dow Jones Industrial Average’s best day ever (15.34%) came in 1933, a year that saw the index rise a jaw-dropping 66.69% following four straight years of brutal declines.

But of the Dow’s 20 best daily rallies, the other 19 came in bear markets. And only three* of those came after the stock market had bottomed out.

Watch the VIX – Not Wild Stock Market Swings

Instead of watching wild single-day swings, analysts advise investors to track the trajectory of the CBOE Volatility Index (VIX)  for clues about where stocks are headed.

BTIG chief equity and derivatives strategist Julian Emanuel said last week that the market likely wouldn’t secure sustained upward momentum  until the VIX ticked below 50 and stayed there.

cboe vix, stock market
The CBOE VIX swung below 50 on Friday. Julian Emanuel says it needs to stay there before the stock market can truly begin climbing back toward its highs. | Source: Yahoo Finance 

The stock market’s “fear gauge” swung below 50 last Friday after peaking as high as 85.47 in mid-March.

But with the Dow heading for another 1,000+ point rally, history suggests investors should be skeptical about whether it will stay there.

*(The Dow has not yet hit a new low since jumping 11.37% on March 24, 2020.)

Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com