Dan Niles: Bear Market Rallies & Pension Rebalancing

This latest rally is being helped by pension funds selling bonds and buying stocks at month/quarter end to rebalance their portfolios over the past week. Only 9 times in 30 yrs has the difference in performance of the S&P500 vs. Bond Market Return (LBUSTRUU Index) been greater than 10% with 5 trading days left in the quarter. For example, with 5 trading days left in the month on 3/24, the S&P was down 17.2% with the bond market also losing 2.3% for a difference of 14.9%.  Due in part to pension fund rebalancing, the S&P has rallied 7.3% over the past 4 trading days not including today (3/31), which is inline with the historical average of a 6.8% rally over 5 trading days. However, the average over the next 5 trading days is a loss of 1.1% and it is up only 25% of the time.  On a positive note, the bond market continues to rally and is up 88% of the time over the first five trading days of the new month and gains 0.5%. (See below.)

During the Great Depression, there were 8 gains that averaged 23.6% over 52 days while the S&P lost 86.2% over 33 months. Unfortunately, these gains were followed by nine declines averaging 32.6% over 64 days.  This most recent rally in the S&P is a pretty typical bear market rally.