What Is a Relief Rally?
A relief rally is a reprieve from a more extensive market sell-off that outcomes in briefly higher securities prices. Relief mobilizes frequently happen when anticipated negative news turns out to be positive or less extreme than expected. A relief rally is one type of bear market rally.
Market participants price in a wide range of types of events, for example, the release of a company's quarterly earnings report, election results, interest rate changes, and new industry regulations. Any of these events can trigger a relief rally when the news isn't generally so terrible true to form. Relief rallies occur in various asset classes like stocks, bonds, and commodities.
Understanding a Relief Rally
A relief rally frequently occurs in the midst of a secular decline in the market or determined selling pressure that lasts for numerous days. Relief rallies occur for individual stocks, also. Somewhat surprisingly good financial outcomes at times light relief rallies for pummeled stocks with a long history of missing analyst expectations for some quarters.
Some of the time, even a lower-than-expected loss can touch off a relief rally, or they may be triggered by a more positive tone on a company conference call with analysts. Part of the explanation is that somewhat uplifting news once in a while makes short sellers buy stock to cover their positions, which can trigger a short covering. This is finished as short-sellers hope to stay away from additional losses as prices rise.
Since bear markets last for long periods of time, they can correct an emotional drain on investors expecting a market circle back — consequently the "relief" when indications of a bounce show up. Market advisors caution against emotional reactions to market volatility, as investors might panic and make judgment errors with respect to their holdings.
Recognizing a relief rally can be testing, even for experienced traders. Much of the time, such a rally can last for quite a long time or even months before the continuation of a longer-term descending trend.
A relief rally doesn't be guaranteed to mean certain doom for a secular decline, in any case. Both the outcome of the dotcom bubble and the 2007-2008 financial crisis saw several relief rallies for stocks, just to see recharged fears push market prices lower once more.
Sharp relief energizes that happen in any case bearish markets are some of the time called a dead cat bounce or sucker's rally. This type of rally might fool some into thinking there is a reversal in the trend, just to find the bear market continuing before long.
- One can be triggered by somewhat uplifting news, with short-sellers helping push the stock higher by covering their positions.
- A relief rally is described by a rise in securities prices that acts as transitory relief from more extensive selling pressure.
- Relief revitalizes generally are seen during a secular bear market.