Markets enjoy a “reflexive rebound”

6 months ago, when the blog last reviewed global stock market performance, it thought it likely we would “continue to see major bear market rallies“. Coincidentally, 7 March proved to be a market bottom, since when markets are up a minimum of 36%. Russia is the best performer, up 108%, whilst China is the weakest. India is up 95%, with other markets up around 50%.
It has been a good time for those able to catch the bottom, and bad news for bears who forgot that the biggest rallies occur during major market collapses. But as the chart shows, even after these rallies, markets are still in a very bad way. Shanghai and Russia are down more than 50% versus their earlier peaks: even the best performer, Brazil, is down 21%.
This suggests we are following the classic pattern identified by Merrill Lynch’s technical market guru, Bob Farrell, that “bear markets have three stages – sharp down, reflexive rebound, a drawn-out fundamental downtrend”. The blog therefore fears we are coming closer to the end of Farrell’s 2nd phase, and towards the start of the most painful phase of all.