Stock Market Rally 101: Things You Should Know
Stock market rallies are sustained rises in index and stock prices, typically an increase of 10% to 20%. This movement is basically the result of a significant surge in demand for a particular asset that can happen in many market conditions like declining or flat markets.
A stock market rally is often linked to bull markets although it can also take place in bear markets. However, for it to still be considered as a bear market, the rally shouldn’t go beyond the price level that marks the beginning of the initial decline.
How to Distinguish between a Bull Market Rally and a Bear Market Rally
There are several main differences between bull and bear markets that could help you pinpoint the existing trend and where it might go to next.
- Volume – When there are fewer market participants that engage with a trend, it indicates a weak movement of the market. On the other hand, a high buying volume may signal a strong trend. The indicators of volume follow the changes in price and number of executed trades to determine the momentum. Good examples of these are on-balance volume and money flow index or MFI.
- Momentum – Most of a time, a rally that losses momentum could be identified through the serious of constantly lower closing prices called lower lows. Meanwhile, a rally that gains momentum notably has increasingly higher highs or higher closing prices. Aside from the momentum indicator, some other common tools are the stochastic oscillator, moving averages, and the relative strength index or RSI.
- Volatility – Even though indicators of volatility don’t convey the movement’s direction, monitoring the speed of the movements of prices can indicate the sentiment in the market.
- News – While it is not really sensible to use the latest news as your sole tool for analysis, the number of positive news might indicate of what will come. A market reversal might be lurking in the horizon if there are lesser numbers of good news.
What to Do During a Stock Market Rally
In general, how you react to a stock market rally is dependent on the specific type of market rally that is taking place. When there is a bull market rally, you can take on additional risk and open more long positions. If a bear market rally is happening, you might consider short selling or exercise caution.
However, your reaction might also vary based on whether you are a short term trader or a long term investor. If you are a longer term investor, you may choose to completely stay away from bear market rallies or you may also choose to diversify your investment portfolio with the higher risk positions.
In case you are a trader, being able to identify a bear market rally might be a great chance since derivatives like CFDs and spread bets let you speculate on the falling and rising prices alike.
As long as you got a good strategy on when to enter and exit the market combined with a good risk management plan, you can always make the most out of bearish and bullish market movements.