Hello everyone, and welcome to another installment of Macro Mondays! A few weeks back, we talked about market corrections and how/why they occur. Today I thought I would introduce another market-related term for you arsenal of knowledge: 'relief rallies.' Markets experience plenty of short/long term activity, but this is one of those short-term surges that generally surprises many investors and they often lose out of gains because they never saw it coming.
Hopefully we can help correct that a bit today. For more information about relief rallies and other stock terms, visit Investopedia by CLICKING HERE!
What is a 'Relief Rally'?
A relief rally is an increase in market prices that occurs because expected negative news does not end up materializing, or is less severe than anticipated. Poor economic data, corporate earnings or political outcomes are all events that may be "priced in to" a market. If these data or events actually turn out to be less poor, or even positive, a relief rally can take place. Relief rallies can occur in many asset classes, including the stock market, bond market, commodities such as oil, and others.
How is a 'Relief Rally' different from a regular rise in the market?
A relief rally differs from a typical rise in market prices in its cause. Markets may rally due to a positive surprise, however a relief rally suggests that the news would be fairly negative to begin with. Specifically, this sort of rally occurs when that expected bad news does not in fact occur, or is less severe than those expectations would have predicted.
An example could be if unemployment has been trending worse over some period of time, and analyst's estimates suggest a continuation of this trend. If unemployment figures instead show only a moderate decline in jobs, or even an increase, prices will tend to go up. Similarly, in a single stock, corporate earnings that come in flat or slightly positive when estimates were for negative earnings could cause a jump in the price of those shares.
Are Relief Rallies Short-Lived?
If relief rallies are knee-jerk reactions to data that surpasses otherwise negative expectations, it suggests a behavioral component and could end up being short lived. Furthermore, if the positive piece of news that sparks a relief rally is just a one off that does not confirm a change in the direction of a trend, it could quickly fade as that downward trend continues. As a result, relief rallies are sometimes seen more often during bear markets where the overarching trend is downward. Sometimes referred to as a "dead cat bounce," some relief rallies can be quite pronounced as short sellers are squeezed to buy back shares at higher prices. If it turns out that such an increase in prices is persistent, then it may also ultimately signal a reversal in trend from a bear to a bull market.
A recent example of a relief rally has been in the crude oil market, where the trend from 2015 to 2016 has been downward. Unexpected news from oil producing nations to freeze supply encouraged a relief rally as investors were not expecting such a freeze in production capacity.
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