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Technically Speaking, the Dow Just Rocketed Out of a Bear Market

Sarah Ponczek

(Bloomberg) -- As ridiculous as it sounds, the Dow Jones Industrial Average just climbed out of the bear market it entered two weeks ago.

It’s a development that speaks to the tenuousness of market conventions in times of extreme volatility. The biggest rally since 1933 helped push the gauge up the requisite 20% from the low it hit Monday, meeting one time-honored definition of a bull market.

Right now, it’s a milestone only a statistician could love given the index remains almost 25% below the record high it touched on Feb. 12 -- though that doesn’t mean it won’t keep going.

While weird, bounces of similar velocity happen from time to time in fast-moving markets and aren’t taken seriously by market historians until they start to show staying power. U.S. stocks justed ended one of the longest bull markets ever.

Other measures of stocks are nowhere near the 20% threshold, with the S&P 500 up about 11% and the Nasdaq 100, which bottomed a day earlier, up about 10%.

“We’re in this intermediary phase where we’re going to have big up periods and big down periods. I don’t think the coast is clear,” Bob Doll, Nuveen Asset Management’s chief equity strategist, told Bloomberg Television. “I’d be a buyer on red days, if you will, and a trimmer on green days. Expect choppiness.”

The Dow was the first mover on the way down, too: its membership and archaic weighing system caused it to beat practically everything into a bear market. Now that’s going in reverse. Made up of only 30 blue-chip giants and weighted by share price, rather than market-capitalization, the Dow is getting an outsize boost from companies previously pressured by the coronavirus -- Boeing Inc. in particular.

Boeing shares have soared as much as 70% over the past three sessions amid the prospect of imminent congressional aid for the beleaguered plane manufacturer. The jet-maker makes up more than 5% of the Dow, compared to less than 0.5% of the S&P 500. The company isn’t even included in the Nasdaq 100.

So far this week, the surge in Boeing shares has accounted for a fifth of the Dow’s advance, data compiled by Bloomberg show. UnitedHealth Group Inc. and The Home Depot Inc.’s performances have each driven another 10% of the Dow’s gain. United Health and Home Depot are the second and third largest weightings. Neither appear in the Nasdaq 100.

The divergence also reflects the role of tech stocks as a haven during the rout -- the Dow fell faster and now is rising faster. Thanks in part to internet giants like Amazon.com Inc. and Netflix Inc., whose shares are higher this year and aren’t in the Dow, the blue-chip gauge is trailing the S&P 500 by 2 percentage points year-to-date and the Nasdaq by 12 percentage points. Versus the tech-heavy gauge, the Dow is still on track for its worst quarter in eight years.

“There is no doubt some of the names that have been destroyed in the past week were driven there by force selling and fear,” said Nathan Thooft, Manulife Investment Management’s head of global asset allocation. “And we are now seeing some people take a step back and say, ‘Wait, these names are not going away.”’

That the bull-market milestone it came just hours after the government reported an unprecedented surge in the number of Americans seeking jobless benefits underscores how fragile the rally may be. The U.S. economy is in tatters after large regions of the country shut down to help prevent the spread of the deadly coronavirus.

Market optimists point to both monetary and fiscal stimulus as reasons for the sharp comeback, though a large swath of investors would be quick to say that massive rallies happen in the deepest of bear markets. With stocks facing trading halts or limits in 10 of the last 12 days, conditions haven’t necessarily been orderly or calm.

The steep decline that brought the Dow down 37% from a record resembled a “waterfall decline,” according to strategists at Ned Davis Research, marked by persistent selling over weeks, surges in volume, and a collapse in confidence. While no two scenarios are the same, usually such fast falls see the lows tested again.

Of 13 similar plunges since 1929, nine of them saw the Dow break the initial lows. And of the four instances in which the benchmark didn’t fall to fresh lows, it at least retested the bottom in three of them. The only exception was the most recent case: December 2018.

“We caution against recency bias,” wrote strategists including Ed Clissold. “The temptation is to breathe a sigh of relief that the waterfall is over and jump back into the market. History suggests that a more likely scenario is a basing and testing period that includes a breaching of the waterfall lows.”

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