"This Isn't Normal Price Action": Was Today's Historic Surge Just A Bear Market Rally

To the bulls, today's rally was long overdue.

Whether today's record 1,086 point surge (and 5% jump) in the Dow was the result of Trump saying yesterday that shares present a "tremendous opportunity to buy" (so BTFD), or thanks to White House advisor Hassett's assurance that Fed Chair Powell's job is "100 percent safe", or due to a major short squeeze of CTAs all of which had just turned short on US stocks, or the result of a massive $64 billion pension reallocation into stocks, or simply a bounce from massively oversold conditions, one which saw the RSI crash to 14 on Monday and the CNN Fear and Greed index plunge to a record low...

... is probably irrelevant: what matters is that stocks exploded higher just as the S&P was poised to slide into its first bear market in a decade.

"We’ve had times when we dropped 20 percent and went into recession but this is an example, so far, where the market realizes a recession isn’t imminent, and going down 20 percent doesn’t make sense,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, told Bloomberg. "It’s somewhat telling that we didn’t cross it, we didn’t officially enter into a bear market."

But did today's rally give an "all clear" signal to buy stocks? As numerous traders opined today, it is common knowledge on Wall Street that furious rallies are common during market drops and bear markets. In fact, much more common then than during a regular bull market.

"This is not the kind of price action you see in normal bull markets,” said Robert Baird equity sales trader Michael Antonelli. "This is just a face ripping short cover rally. I am 100 percent not saying we are in a situation like 2008 now, but look at October 10, 2008 to October 13, 2008: the market rose nearly 12 percent in one day. October 27 to October 28, 2008, it rose 11 percent."

"Bear markets always serve up some very nasty rallies," said Doug Ramsey, chief investment officer of Leuthold Weeden Capital Management, which manages about $1.2 billion. "There’s a saying that bear market rallies look better than the real thing so I’d expect at some point here a 3 to 4% up day. It’s not unusual at all to see that in a bear market."

"This type of volatility primarily occurs in bear markets" said Fred Hickey, editor of the High-Tech strategist. "The stock market was short-term oversold & due for a sharp rally. But a 1,086 point rally, while fun for the bulls, will scare some investors away. They'll realize the current market is too dangerous for more risk-adverse investors."

In fact, according to Bloomberg data, in eight previous bear markets the S&P 500 experienced rallies of greater than 2.5% more than 120 times as the benchmark plunged from peak to trough. From the collapse of Lehman to the financial crisis bottom in March 2009, the S&P 500 rallied more than 4 percent on 13 different occasions.

The best visual confirmation that today's rally was nothing but a "face-ripping" short cover rally in the context of a bear market, comes from Matt Thomson who today tweeted the following chart showing historic market gains of more than 4% since 2000. Not surprisingly, the biggest cluster took place during the financial crisis in late 2008 and early 2009, before the market eventually bottomed.

So while today's rally was clearly viewed with skepticism after the recent rout, some laid out what would convince them that a bottom may indeed be emerging.

For Baird's Antonelli, along with other indicators, a bottom would be marked by at least two consecutive days in which the percentage of stocks rising exceeds 90, an event that happened today. "I view it with skepticism until it’s proven with a few metrics: volume, breadth, sentiment," he said.

"But right now I just view it skeptically because this isn’t normal price action."