You probably know what "bull" and "bear" markets are (the former is a description of a market that is trending higher, while the latter is the opposite). Well, ladies and gentlemen, there is another, timely zoomorphic description of market trends: "bunny" markets!

Dr. James Paulsen of Wells Capital Management (a subsidiary of Well Fargo Asset Management) created the new moniker in a recent report just in time for the Easter holiday season. He defines a bunny market as follows:

"Unlike an enthusiastic bull or a scary bear, a bunny market hops about a bit but really does not go anywhere and bunnies have often dominated the stock market during the latter stages of past economic recoveries ... Bunny markets have also occurred as investors initially adjust to the Federal Reserve starting to tighten monetary policy."

The chart below shows the Russell 3000 Index (large, mid, and small capitalization stocks in the U.S.) exhibiting bunny market qualities for the last 19 months:

On August 31, 2014, the index closed at 1,195; this past Friday's close was 1,194.

Fits the definition well. Very bunny-like.

As Paulson alludes, the onset of this bunny market appears to have coincided with the Federal Reserve Bank ending its quantitative easing program in October 2014. By ending the $4.5 trillion bond buying program — which itself was a radical policy tool used for six years to steer the U.S. economy through the financial crisis — the Fed shifted to a tighter monetary policy. The bunny started to hop more aggressively in August of last year seemingly anticipating the Fed's first explicit increase in short-term interest rates in December.

And the market has hopped up and down, but so far really going nowhere, ever since.

The Dow Jones Industrial Average Index during the 17-year period between 1964 and 1981 (made famous by Warren Buffett in a series of speeches in 1999) was perhaps the king/queen of bunny markets:

The index closed at 874 on December 31, 1964, and, after hopping around for 17 years, it closed at 875 on December 31, 1981. While a rabbit will not normally attack humans, the volatility during this time period was reminiscent of something out of Watership Down and appeared to challenge long-term investor patience.

Let's hope this bunny market does not last that long!

Anyone know if bulls eat rabbits?

 

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