Why we should be careful of this ASX 200 rally

Here's why I think all ASX investors should be wary of this ASX 200 recovery today.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The S&P/ASX 200 Index (ASX: XJO) has continued its fine form of late and is recording a 3.16% surge today at the time of writing. That has put the ASX 200 on 5,341.9 points – its highest level in two weeks. If this trend holds until the end of the day, it will mean the second day in a row of healthy gains for the ASX 200.

Since we saw one of the biggest upward swings ever yesterday (with a 7% bump), investors might be feeling optimistic that this ASX 200 bear market has finally been brought back from the brink. Ahoy, we've found the bottom!

Well, I hate to crash the party, but I think investors should be wary, very wary.

A lesson from history

I was looking at a graph of the ASX 200 this morning during the share market crash that accompanied the GFC over a decade ago. It is a graph filled with false starts, fake recoveries and 'bounces' that went nowhere.

For example, in November 2007, the ASX 200 peaked at around 6,700 points before falling off a cliff to around 5,260 points by March 2008. From there, the index rallied all the way up to 5,930 points in May, before plunging down over the next few months to finally find its bottom of 3,145 points in March 2009.

However, I'm not inferring that this pattern is likely to be repeated in 2020. I have no idea what the markets will do this afternoon, tomorrow or next year.

But I do know that 'V-shaped' crashes are rare, especially if there are external factors at play (such as the GFC or the coronavirus). And if we truly have already found 'the bottom' of this 2020 crash, it will be the shortest, sharpest bear market in recent history. This is possible, of course, but in my humble opinion, unlikely.

How should we invest in ASX 200 shares then?

Well, I can't speak for everyone, but here's how I'm investing. If the market does recover from here, fantastic! I've already bought some shares during this bear market, so I will look forward to seeing them in action during any recovery.

And if the markets turn again and fall further, it's just a good opportunity to add to my positions. Yes, it will be painful on paper, just as the last month has been painful. But a share market crash is still a fire sale in another name. And fire sales are a great time to do your shopping!

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Man drawing an upward line on a bar graph symbolising a rising share price.
Broker Notes

Broker says WiseTech shares can hit $135

Bell Potter has good things to say about this rebounding tech stock.

Read more »

a man holds a firework sparkler in both hands as a shower of sparkly confetti falls from the sky around him as he smiles and closes his eyes in a celebratory scene.
Broker Notes

Stock market outlook: Macquarie 'ready to party like its 1999'

It may not be too late to invest in the share market according to the broker.

Read more »

A woman wearing dark clothing and sporting a few tattoos and piercings holds a phone and a takeaway coffee cup as she strolls under the Sydney Harbour Bridge which looms in the background.
Broker Notes

The smartest Australian stocks to buy with $400 right now

Let's see why these shares are highly rated by brokers.

Read more »

Woman and man calculating a dividend yield.
Share Market News

What ASX 200 investors just learned about the next RBA interest rate move

Will ASX 200 investors get a much-awaited interest rate cut in August?

Read more »

person with large headphones looking puzzled holding their hand to their chin.
Broker Notes

Does Macquarie prefer Harvey Norman or JB Hi-Fi shares?

Both companies have market-beating long-term track records.

Read more »

A young man talks tech on his phone while looking at a laptop. A financial graph is superimposed across the image.
Share Gainers

Why Capricorn Metals, Insignia, Perseus Mining, and Qoria shares are storming higher

These shares are having a strong session on Tuesday. But why?

Read more »

A young man sits at his desk with a laptop and documents with a gas heater visible behind him as though he is considering the information in front of him. about the BHP share price
Broker Notes

Leading broker has just downgraded BHP shares. Is it time to sell?

Macquarie sees little upside. But why?

Read more »

A blockchain investor sits at his desk with a laptop computer open and a phone checking information from a booklet in a home office setting.
Broker Notes

Are non-bank lenders a lucrative alternative to the big 4 banks?

The big 4 banks are widely perceived as being fully valued or overvalued.

Read more »