Stock markets – muddle through for a few months?

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In the graph below, Chart of the Day illustrates rallies that followed massive bear markets. (A “massive” bear market is defined as a decline of greater than 50%.)

Since the Dow’s inception in 1896, there have been only three bear markets during which the Dow declined by more than 50% – early 1930s, late 1930s until early 1940s, and during the recent financial crisis. The chart also includes the rally that followed the dot-com bust during which the Nasdaq declined by 78%.

“The current Dow rally has followed a path that is fairly similar to that of post-massive bear market rallies. The initial surge of the current rally lasted nearly 300 trading days and has been trading flat/choppy ever since,” said the report.

Chart of the Day also refers to the fact that the current rally has just made new rally highs. “However, both the 1932 Dow rally and the 2002 Nasdaq rally briefly made new highs during their flat/choppy phases. If the current rally were to continue to follow the post-massive bear market rally pattern, the current choppy phase would continue for another 150+ trading days (i.e. 7+ months).”

Source: Chart of the Day, December 17, 2010.

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