Since March 2009 the Dow has rallied 92% in just under 2 years. By comparison it took 5 years for the Dow to rally 97% from late 2002 through late 2007. Going back to 1896 there have been other occurrences in which the Dow has made similar impressive rallies in a short period of time (2 years or less) after previously undergoing a substantial sell off.
Looking at the last 50 years there hasn’t been an occurence in which the Dow has gained over 90% in 2 years or less after undergoing a substantial sell off (25% or more). The last closest event was in the mid 1970’s when the Dow rallied 80% following a 47% sell off. This was followed by a 28% correction as the Dow went through a 7 year consolidation period in which it basically went nowhere before finally breaking out to the upside in 1983.
Going furhter back to the 1930’s, extreme volatility followed the 1929 to 1932 market crash when the Dow lost 89% of its value. After bottoming in July of 1932 the Dow then rallied 100% in 3 months which was then followed by a 39% correction. This correction was followed by a 120% rally in 6 months which was then followed by a 25% correction. Then this was followed by a 132% rally over the next 2 years which was followed by a 50% correction in the late 1930’s.
Going back even further to the early 1900’s there was a series of sharp moves in both directions over a very short period of time from 1904 through 1922. During this period of time rallies ranged from 87% to 143% which were all followed by corrections ranging from 40% to 49%.
What this shows is that big oversold rallies that occurred in a short period of time after significant large corrections are not something new. Most of us have never experienced it until now.
“I’ve never seen a market like this,” said Paul Mendelsohn, Chief Investment Strategist at Windham Financial Services, “I’m showing, by every technical and quantitative standard I have, this market is at extreme levels. But no matter where we start out in the morning, buyers come in.”
“With so much momentum in the market, we are likely to see some sideways consolidation next week but nothing more than that,” said Ryan Detrick, technical analyst at Schaeffer’s Investment Research in Cincinnati, Ohio.
The charts that accompany this article show these significant corrections and consolidations following each big rally. If history repeats itself the market will remain volatile for several more years and once this latest sharp oversold rally does peak it will likely be followed by another substantial correction or an extended choppy consolidation period. (Or you can take solace in that old axiom “this time its different”.)
For now the market is still rallying, the trend is up, and trades are entered long. But be vigilant.
Trade with a plan.