Stock markets' upturn doesn't mean bear is dead

— -- Investors got one early piece of evidence Monday to give them hope that the bear, while maybe not dead, is at least in hibernation.

Sparked by optimism about President-elect Barack Obama's economic stimulus plan, stocks rose sharply and extended a rally that's now more than two weeks old.

Most important, though, the Standard & Poor's 500 index, which measures how the broad stock market is doing, is up 20.9% from its bear market low set on Nov. 20. The S&P 500 jumped 3.8% to 909.70 Monday, as the Dow Jones industrial average rose 299 points to 8934.

Breaking above the 20% level is significant for investors, since a gain of that size is the unofficial definition of when a bear market has ended and a bull has begun. But market historians and analysts are taking this 20% run-up with a dose of skepticism.

"This happens … in bear markets," says Bryan Sadoff of Sadoff Investment Management. "Moves both to the upside and downside can be violent and happen quickly."

Market observers remain dubious of the ongoing rally, because the 20% rule:

•Doesn't always work. Since 1940, stocks usually stay up once they rally 20%, says Jim Stack of InvesTech Research. Stocks have only failed to start a bull market once since 1940 after a rally that big.

The trouble, though, is that one failure since 1940 occurred during the most recent bear market that ended in 2002. The S&P 500 rallied 21.4% between the Sept. 21, 2001, low and Jan. 4, 2002, he says. But the market stalled and ended up losing a third of its value before finally hitting it bear market bottom on Oct. 9, 2002.

The 20% rule's track record is even worse during the Depression-era bear from 1929 to 1932. The S&P 500 had four 20% rallies during that bear, Stack says.

•Isn't necessarily agreed upon. Most market historians qualify their definition of bull markets, due to the risk a 20% gain is a trap. Stack, for instance, requires stocks to be at a 12-month high to be a bull.

Market research firm Ned Davis Research pays closer attention to the Dow, which is 18.3% above its bear market low set on Nov. 20, says Ed Clissold at Ned Davis. To be a bull, the Dow must gain 13% and stay up for 155 calendar days. Ned Davis also views a 30% rally as a new bull, but only if the market holds the gain for 50 calendar days, Clissold says.

That's why investors need more than a big rally to pronounce the bear dead, says Sam Stovall of S&P. "It's a combination of (price) change and time," he says.