A rally refers to a period of continuous increase in the prices of stocks, indexes or bonds. The word, rally, is typically used as a buzzword by business media outlets such as Bloomberg to describe a period of increasing prices.
A rally occurs due to several reasons. Short-term rallies are caused by news or events such as a new CEO appointment that affect the demand-supply equilibrium. Rallies can also be long-term, which result from changes in macroeconomic factors such as announcements of changes in key interest rates and fiscal policy.
The stock market is volatile and known for its constant fluctuations. Even seasoned analysts find it hard to predict the direction of the market. Stock prices can go down suddenly after a long period of increase. The market can also experience a sudden increase in stock prices after a long-term downward trend.
Bear Market Rally
A bear market rally refers to a temporary uptrend in prices during a primary trend bear market. The increase is usually between 10% and 20%. It starts suddenly and does not last long. Notable bear market rallies occurred during the stock market crash in the Dow Jones Industrial Average in 1929 all the way to the market bottom in 1932, and in the late 1960s until the early 1970s. It comes in two types:
#1 Short-term bear market rally
This usually lasts from half a day to two days. A short-term bear market rally happens when the stock market experiences several lows within a week or month.
#2 Intermediate-term bear market rally
When the stock market experiences multiple bounces or short-term rallies, they are called an intermediate-term bear market rally.
At first, a bear market rally looks like a good thing as it serves as a respite from an otherwise downward direction of the market. However, it can be risky for investors who buy stocks, thinking that things will improve over time. They may end up losing money when the rallies end and the market resumes its downward spiral.
What to Do During a Market Rally
You can avoid losing money during a market rally, but it entails planning and strategy. Here are some guidelines to consider taking advantage of the upward trend in the market:
Mode of investment
Consider the situation of the market when investing, especially if you’re into equity mutual funds since these investments are significantly affected by the mood of the market. Instead of placing lump sum bets, exercise caution when there’s a bullish market rally.
Establish a strategy on which asset classes to invest in. As the prices of small- and mid-caps increase and the bets become risky, consider allocating some of your money towards large-cap equity funds, as these may be able to maintain portfolio returns during a market rally.
Higher returns are always a welcome idea, but investors also need to consider the other side of the coin, which is risk management. Many people say, “Don’t put all of your eggs in one basket.” In stocks and investing, it means making your portfolio as diversified as possible, so you can better manage risk.