Is that a light I see?

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Rally or Trap?

Every investor currently in the market has been pleasantly surprised with the 1500 point increase (as of this post) we have enjoyed over the last seven weeks. Many are beginning to whisper ever so quietly around the water cooler about the end of the Bear Market. Is is possible that the worst is behind us? Maybe, but before we get too excited, we need to understand that short term rallies can and do occur during a Bear Market.

In this month’s Sound Mind Investing (SMI) newsletter, Mark Biller, has a great article reviewing the first quarter results, titled Bear-Market Bottom or Just a Bounce?

In three furious weeks, it had rallied more than 23%, the sharpest rally of its kind since 1938. Investor psychology pivoted sharply, from overwhelmingly discouraged to cautiously optimistic. Few were willing to actually call it a bear-market bottom, but most everyone was secretly wondering if it just might be.

Biller reminds us that during the Great Depression, there were six rallies of more than 20% before the market really hit bottom.

At the Bottom?

Whether we are at the bottom, or just observing a Bear Market rally, one thing is sure. You should not try to time the market bottom. If this is the bottom that’s great, but your investment strategy doesn’t need to change.

If you have been consistently contributing to your retirement account, this rally is what we have been waiting for. As the market was tanking you were buying more and more shares at lower and lower prices. Now because of this little rally, you are reaping the benefits of remaining faithful. This type of increase is the true benefit of dollar cost averaging.

What if we are not at the bottom? What if the market goes even lower than it was just two months ago? Unless you are only days away from retirement, I would encourage you to just stay calm. Keep working your plan and don’t get crazy. If things start going down again, you will be buying stock while it is on sale. The key is to just stay calm and keep looking for the light at the end of the tunnel. The American economy has seen bad times before and we always work our way out.

One last thought. I you enjoyed reading the SMI article by Mark Biller, I would encourage you to sign up for their monthly newsletter. The information and service they provide is excellent. They offer a free 30-day trial subscription so you have nothing to lose.