Yesterday, saw a record surge in the markets (and another epic buying program today).
Such was not surprising given the extreme oversold condition in the market. More importantly, throughout market history, the biggest bull rallies have occurred during bear markets.
— Matt Thompson, CFA (@dynamicvol) December 26, 2018
The last two day’s relief rally was simply that.
As shown in the chart below, following the breakdown of the market from its consolidation pattern in October and November, the market plunged 20% from its previous all-time highs. Despite the massive surge in stocks yesterday, all the market managed to do was recoup 2-days of losses.
From the previous peak in early December, the market has yet to even achieve a 38.2% retracement of that decline. It would not be surprising to see this rally try and recoup a full 61.8% of the decline over the next several weeks.
However, that may not even be enough to solve the biggest risk to the market currently.
In 2010, as Ben Bernanke was preparing to unleash the second round of “Quantitative Easing” upon the economy, he noted specifically the goal was to increase the “wealth effect” in order to assist the nascent economic recovery that was underway.
What exactly does that mean?
“The wealth effect is a theory suggesting that when the value of equity portfolios are on the rise because of accelerating stock prices,