Stock market rallies: what are they and what causes them?

What is a stock market rally?

A stock market rally is a broad and rapid rise in share prices, often defined as a 20% increase from a recent low. This is the opposite of a stock market correction or a stock market crash, which is a sustained and rapid decline in prices by 20% from a recent high.

The term ‘stock market rally’ applies to wider market so they’re measured by changes in the price of indices – such as the S&P 500, Dow Jones and FTSE 100. Whereas a ‘stock rally’ is rise in a single company’s shares.

It’s important to understand the difference, because there will be times when the broader market is rallying, and individual companies could be in decline – and vice versa.

Although stock rallies are most discussed, bonds, indices, currencies and commodities can all experience rallies.

Bull market rallies vs bear market rallies

Upswings can occur in periods of both rising and falling prices. Yes, even bear markets can have bounces. Although they tend to be smaller in size, as they cannot bring the price back up by 20% and end the downturn.

To differentiate the two, you’ll often hear them called bull market rallies and bear market rallies. In both cases, the rising prices will typically happen after a period of sideways or falling prices.

A bear market rally is normally caused by false signals that lead traders and investors to believe that they’ve found the bottom of a market, and a bullish run will start. However, the rally is just a momentary pause in the bearish sentiment.

Eventually, sellers take control of the market again, pushing prices back down, which can cause large losses for traders that rush into long positions without the proper risk management. This is why bearish rallies are also known as ‘bull traps’.

What causes stock market rallies?

A stock market rally is caused by news that surprise markets in a positive manner, making equities more desirable in the near term. As demand for shares increases, the influx of capital leads to higher and higher bids for the assets – especially if existing shareholders are unwilling to sell.

For the entire stock market, rallies are usually the result of macroeconomic changes, or favourable government policies. But rallies in individual company’s shares can be caused by a range of factors, such as:

• Above-expectations earnings reports
• Changes in management
• New product launches
• Loosening industry regulation

How to trade a stock market rally

Typically, a rally provides traders with an opportunity to go long on both indices and individual shares. But short-term declines can happen within a prevailing bullish run, so there will still be volatility and opportunities to short sell.

You can speculate on stock market rallies with City Index in just four easy steps:

1. Open a City Index account, or log in if you’re already a customer
2. Search for the asset you want to trade in our award-winning platform
3. Choose your position and size, and your stop and limit levels
4. Place the trade

Or you can try trading risk free by signing up for our demo trading account.

How do you identify a market rally?

You can identify a market rally using a variety of technical indicators. Oscillators and trend indicators are among the most common but there are a variety of ways to see whether a rise in prices is going to continue into a rally or reverse.

Here’s a few popular methods of identifying market rallies.

1. Volume oscillator. Using trade volume is probably the most common way of finding strong price movement, as it shows us whether the action has conviction, or whether it’s likely to reverse. A positive oscillator value tells us that there’s enough market support that the rally will continue, while a negative one shows the move lacks support. Learn more about trading volume
2. MACD. MACD is a momentum indicator, so when the indicator breaks above the signal line, it shows that there’s a positive movement upwards – at least for the short-term. Learn how to use the MACD indicator
3. Support and resistance levels. It’s common for price action to reverse when it reaches a level of support, as traders rush in to take advantage of the lower price, taking the market from bearish to bullish. Likewise, a rally could end at a level of resistance or – if the level is broken – continue even higher. Learn more about support and resistance levels

How long can the stock market rally last?

Stock market rallies can last for varying amounts of time. There’s no real duration for when an upswing becomes a rally, as it depends on what kind of trader you are.

For example, a rally to a day trader might only be a 30-minute rise in prices, whereas an investor might look for years of rising prices.

To make it easier, there are a few categories of rally, which traders use to describe the different durations.

Intraday market rally

For day traders, intraday rallies are the most important. These upswings last from minutes to hours, but never more than a day. They’re popular for taking advantage of short-term movements, which is why they’re often ignored by longer-term investors.

Intraday rallies are known for their volatility. They require more monitoring than other types of rallies, as the price could reverse at any moment.

Intraday rallies are also the most common type of bear market rally, as it’s short lived but pushes the market price to a higher high.

Cyclical market rally

Cyclical rallies are a bit longer, tending to last from a month to a couple of years at most. These market rallies are more in line with the entire market cycle, rising when the economy grows and ending in periods of downturn.

Secular market rally

A secular market rally lasts the longest period of time, we’re talking years and even decades. While smaller declines are naturally part of the market cycle, it doesn’t enter a bear market, so the prevailing trend of the price is up.

Secular rallies are hard to identify at the time, so the label is often only given to the price movement years down the line or even after it’s finished.

What's the longest stock market rally?

The longest stock market rally in history was 13 years. It started on March 9 2009, and ended on February 19 2022, when the Covid-19 crisis began to impact financial markets. The S&P 500 went from a closing price of 676.53 to a peak of 3,386.14 during that time – a rise of more than 400%.

Does the stock market rally before a crash?

There can be a stock market rally before a crash. Despite fears of an impending downturn, it’s not unusual for a market will rise sharply in periods of instability. Once a certain price is hit, the market enters into decline – a fall of 20% is needed from that high before it’s considered a crash.