Biggest Stock Reversal Since 2010 Rings of Bear Market Bounce

(Bloomberg) -- For most of December, no rally had been safe in the S&P 500. On Thursday the script was reversed.

The S&P 500 erased a 2.8 percent drop in an afternoon rebound, finishing the day with a 0.9 percent gain. It’s the first time since May 2010 that the index has posted such a huge upward reversal, data compiled by Bloomberg show.

The about-face came one day after a 5 percent rally that itself was the biggest since 2009. On the surface, the rally is good news for investors searching for a bottom after a three-month sell-off sent the S&P 500 to the brink of a bear market. But days like this are rarely good omens.

Since 1990, every comparable reversal came during the 2008-2009 bear market. In other words, as much as the market has shown the impetus to rally, violent action like this normally don’t bespeak a healthy market. The latest bounce happened during a holiday week when prices are typically susceptible to swings because of low liquidity.

“How much do we trust the market’s message, up or down, over this holiday week?” Jeff deGraaf, co-founder of Renaissance Macro Research, wrote in a note. “About as much as we trust uncle Albert to drive home after Christmas dinner.”

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