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Even bears think stocks are in for a rally, says John Authers in Friday’s Short View column. Albert Edwards, the legendarily bearish global equity strategist at Société Générale, said on Thursday that investors should raise their allocation to equities.

For many, this was a stunning development. But Edwards was careful: he is predicting a “bear market rally” and not a rally. The distinction is more than semantic. For this reason he remains strategically bearish, and believes the S&P 500 will eventually fall 50 per cent from its high. But he does suggest raising equity allocations from 35 to 45 per cent – still well below the norm.

In a bear market rally, stocks stay on a downward trend but enjoy a bounce thanks to swings in investors’ sentiment.

Edwards says technical indicators now look so extreme – in other words, fear has so overwhelmed greed – that he is willing to buy stocks.

Individual bearish sentiment is the highest in a decade, and worse than it was in early 2003, when stocks started a protracted rally. Professional investors’ surveys show extreme negativity (although they are not quite as negative as they were last summer). Options markets show an extreme desire to protect against further falls. Put all this together and even Edwards thinks stocks will rally.

There is ample historical precedent. Bear markets follow long drawn-out shifts in fundamentals, but they do not go straight down. In the three years from October 1929 the Dow Jones Industrial Average fell about 90 per cent, but it enjoyed five rallies of between 16 and 48 per cent. In the three years after March 2000, the Nasdaq fell almost 80 per cent, but still had four rallies of at least 22 per cent.

Perhaps the two key lessons from Edwards’ change of heart are: first, do not be fooled into thinking a rally means that we are not in a bear market for stocks; and second, timing the market is very, very difficult.