Are long bear market rallies history?

I have no clue what’s going to happen on the market, but I’d just like to point out something that I haven’t seen anybody really talk about yet. For all the talk about comparing this present market to the bear market of the early 30s, there is one huge, obvious difference: information moves a lot faster today, and we have much more extensive “instrumentation” on the worlds economies. Not only does the flow of information mean that markets will adjust quicker, but the liquidity provided by ubiquitous electronic trading and derivatives means that market swings will occur on a much shorter time scale. Perhaps most importantly, we have much more universal access to economic data than ever before. This means that price information and the beginning of deflation have become apparent much quicker, and to a wider audience, than they did during the great depression.

The upshot of all of this, if I’m right (which is a big if), is that we may never see the kind of extended rally that occured during the bear market that started in 1929. Maybe they’ll just last a few days, or maybe a few weeks. A corrolary of this is that volatility will be much higher than in the aftermath of the 1929 crash. This may be one explanation for why we’ve seen historic levels on the CBOE volatility index (VIX). Usually the VIX peaks around 40 or 50, but these days we’re seeing sustained levels around 70.

So, while I’m going out on a limb, if you’re sitting on cash and tempted to try to time the market and ride the rally we’re currently in, you might want to rethink it. In this day of electronic data and trading, I think the aftermath of the financial crisis will be an extended period of volatility that will eclipse anything the market has seen in its entire history. This crisis may have put the final nail in the coffin in the foolish academic theory of “efficient markets,” but that doesn’t mean the markets can’t be inscrutible and chaotic for an extended period.

2 responses to “Are long bear market rallies history?”

  1. Hi Jon,

    I’m working my way backwards through your posts. For an engineer, you sure seem to know a lot about finance and economics. How is that?


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