What Is a Rally?
Let me explain what a rally is in the financial markets. A rally is a period where you see sustained increases in the prices of stocks, bonds, or related indexes. It usually involves rapid or substantial upside moves over a relatively short period of time. You can find this type of price movement during either a bull or a bear market, where it's called a bull market rally or a bear market rally, respectively. However, a rally will typically follow a period of flat or declining prices.
You should contrast a rally with a correction or market crash, which is a rapid or substantial downward move in short-term prices.
Key Takeaways
- A rally is a short-term and often sharp upward move in prices.
- A rally may occur for several reasons and can be found within longer-term bull or bear markets.
- In general, a rally is caused by positive surprises or economic policies that make asset prices more attractive in the near term.
Understanding a Rally
The term 'rally' is used loosely when we're talking about upward swings in markets. The duration of a rally varies from one extreme to another, and it's relative depending on the time frame you use when analyzing markets. For a day trader, a rally might be the first 30 minutes of the trading day where price swings continue to reach new highs. But if you're a portfolio manager for a large retirement fund looking at a much larger picture, you might see the last calendar quarter as a rally, even if the previous year was a bear market.
A rally happens because of a significant increase in demand from a large influx of investment capital into the market. This leads to prices being bid up. The length or magnitude of a rally depends on how deep the pool of buyers is, along with the amount of selling pressure they face.
For example, if there's a large pool of buyers but few investors willing to sell, you're likely to see a large rally. If, however, the same large pool of buyers is matched by a similar amount of sellers, the rally is likely to be short and the price movement minimal.
You can confirm a rally using various technical indicators. Oscillators immediately begin to show overbought conditions. Trend indicators start shifting to uptrend signals. Price action displays higher highs with strong volume and higher lows with weak volume. Price resistance levels are approached and broken through.
Underlying Causes of Rallies
The causes of rallies vary. Short-term rallies can result from news stories or events that create a short-term imbalance in supply and demand. Sizeable buying activity in a particular stock or sector by a large fund, or the introduction of a new product by a popular brand, can have a similar effect that results in a short-term rally. For instance, almost every time Apple Inc. has launched a new iPhone, its stock has enjoyed a rally over the following months.
Longer-term rallies are typically the outcome of events with a longer-term impact, such as changes in government tax or fiscal policy, business regulation, or interest rates. Economic data announcements that signal positive changes in business and economic cycles also have a longer-lasting impact that may cause shifts in investment capital from one sector to another. For example, a significant lowering of interest rates may cause investors to shift from fixed income instruments to equities. This could create the conditions for a rally in the equities markets.
Bear Market Rallies
Market prices can rise even during a longer-term downtrend. A sucker rally, for instance, describes a price increase which quickly reverses course to the downside. Sucker rallies often occur during a bear market, where rallies are short-lived. Sucker rallies happen in all markets, and they can also be unsupported rallies based on hype rather than substance, which are quickly reversed.
Sucker rallies are easy to identify in hindsight, yet in the moment, they are harder to see. As prices fall, more and more investors assume that the next rally will mean the end of the downtrend. Eventually, the downtrend will end in most cases, but identifying which rally turns into an uptrend, and not a sucker rally, is not always easy.
Other articles for you
Unlisted securities are financial instruments traded over-the-counter rather than on formal exchanges due to not meeting listing requirements.
This text explains market manipulation tactics in securities and currencies, highlighting common strategies, challenges in detection, and examples from global trade.
A Roth IRA is a tax-advantaged retirement account funded with after-tax dollars, allowing tax-free growth and withdrawals under specific conditions.
The Morning Star is a bullish candlestick pattern signaling a potential reversal from a downtrend to an uptrend.
Undisclosed reserves are hidden bank assets counted as Tier 2 capital but not publicly listed on financial statements.
Fast-moving consumer goods (FMCGs) are affordable, high-turnover products with short shelf lives that dominate daily consumer purchases.
Take-home pay is the net income left after subtracting taxes, benefits, and other deductions from gross pay.
A zero cost collar is an options strategy that hedges stock gains by buying an OTM put and selling an OTM call to limit losses and cap profits.
An ASCOT separates a convertible bond into its fixed-income and equity components to isolate equity exposure without credit risk.
Net debt per capita measures a government's debt per citizen to assess fiscal health and is often used politically.