Stock Market Rebound Rallies Are Often Signs of Uncertainty

This is nothing new and most experienced traders and investors know that large gains in the stock market occur more frequently along bear markets than along bull markets.

Some attribute these rebound rallies to short squeezes but bare in mind that causalities are hard to prove in the markets. These rallies may be the result of the usual bull-bear fight and not intentional short squeezes. No one can determine the exact causes.

Below is a chart of S&P 500 since 1960 that shows daily gains larger than 3%. Click on image to enlarge:

As shown on the chart there have been 101 daily gains larger than 3% in the period considered and the bulk of them have occurred during times of uncertainty marked by the vertical dotted red lines. Therefore, large gains are often sign of persisting uncertainty and a result of higher-than-normal volatility.

Highest concentrations of rebound rallies are found along the 2000-2003 and 2008 bear markets and also during the 2011 correction.

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