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Investors warned of ‘bear trap’ rallies as FTSE slides

Investors warned of ‘bear trap’ rallies as FTSE slides

Investors have been warned of sharp jumps in share prices during a bear market, as data shows they usually occur before the market bottoms out.

The coronavirus crisis has wiped 28 per cent from the FTSE 100 since the start of the year as countries close borders, shut down business and cancel all non-essential travel in a bid to curb the virus' death toll.

But earlier this week (March 24) investors had some relief when the UK’s blue chip index saw its second biggest daily jump on record - closing up 9.1 per cent.

This was the FTSE 100's biggest one-day gain since 2008. 

But today (March 26) the FTSE has slipped again, dropping 3 per cent since markets opened.

Analysis of previous downturns in the FTSE 100 show bear markets are typically littered with sharp rallies.

According to figures from Refinitiv, six of the 10 biggest one day gains came between September and December in 2008, but the index did not bottom out until March 2009 after further heavy falls of nearly 30 per cent.

Biggest one-day gains in the FTSE 100 since launch 

24.11.08

9.80%

24.03.20

9.10%

19.09.08

8.80%

13.10.08

8.30%

29.10.08

8.10%

21.12.87

7.90%

08.12.08

6.20%

13.03.03

6.10%

10.04.92

5.60%

20.10.08

5.40%

Russ Mould, AJ Bell's investment director, said: “A hefty rise in the FTSE 100 is welcome, should it transpire, but there remains the risk that any such advance proves fairly temporary should news on the viral outbreak continue to get worse and policy measures require a longer lockdown – and potentially deeper hit to global economic activity – than currently hoped.

“In the bear markets of 2000-03 to 2007-09, the combination of recessions, lofty valuations and corporate earnings disappointments meant that a sequence of rallies became wicked bear traps for those who loved to buy on the dips.”

The other big gains recorded in the FTSE 100 included April 1992, when the UK emerged from a recession, and March 2003, as the UK began to show improvement following the collapse of the technology bubble in 2000.

Jason Hollands, managing director at Tilney, said ‘dead cat bounces’ — where markets stage temporary rallies — were a common feature in most bear markets.

But he added: “The volatility is also symptomatic of the rapidly evolution of news flow on infection rates, public health policy changes to try and stem the spread and increasing actions by governments and central banks to address the economic impact. 

“Markets are lurching around in response to the changing news flow.”

Mr Hollands said it was better not to try to “second guess short-term moves” but focus on fundamentals as trading a portfolio in this environment was “very risky”.

Ben Yearsley, investment consultant at Fairview Investing, added: “Falls [due to the coronavirus] have probably led portfolios to be underweight in equities in a balanced fund, but if the market bounces quickly that position will quickly normalise.

“The honest answer is advisers should do very little as long as you think this is a short-term problem that will work its way through in a matter of months. If you sell now you crystallise your losses and you won't benefit from any rebound in prices.”