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.

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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.

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