A bear market rally is when the stock market experiences a temporary rebound after a prolonged period of decline. This typically happens after investors have been skittish and prices have fallen to attract bargain hunters. The bear market rally may give false hope to investors that the worst is over, only to see the market resume its downward trend. Sometimes, however, a bear market rally can signal a true turnaround in the market.
To spot a bear market rally, investors should look for an increase in volume and price. This is typically accompanied by a decrease in volatility. If the rally is indeed a bear market rally, it will be short-lived as prices will soon resume their downward trend.
Investors who believe they are seeing a bear market rally may choose to take advantage of it by selling their holdings or shorting the market. This can be a risky strategy, however, as there is always the chance that the rally is real and prices will continue to rise.
Those who are risk-averse may choose to wait out a bear market rally and only buy back into the market after prices have fallen again and more certainty exists about the direction of the market.