Take 1929 as an example:
The market rebounded sharply with a 50% rally in 1930 only to see a 3 year bear market. Market technicians will tell you that the DOW rebound to touch the 200 moving average but fail to cross it to confirm a bull market (I'll talk about the significance of this notion later).
In Sept 2001 the stock market had been falling for about 18 months since the dot.com bust and appeared to have stabilised. Unfortunately due to the 911 terrorist attacks, the market fell through its bottom. Many contrarian investors felt at that time that the worst of the worst had happened and the market rallied for six months from Sep 2001 to March 2002 only to fall to new lows in late 2002 when the economic recovery did not meet investors' expectations.
George Soros once explained that while stock markets may not be reliable predictors of the real economy, you can actually get market downturn that is so bad that it causes a recession. If all of us. around the world,believe the recession is going to be over soon and we go out to buy some stocks, look for property and take part in the Great Singapore Sale, we can actually take the global economy out of the doldrums. There is a complex relationship between the market and the economy. When the stock market rises, it helps the economy because companies can raise money by doing cash calls in the stock market to ease their cashflow problems or do acquisitions. If the stock market or property market rises high enough, consumers will regain confidence and start spending. In other words, when markets have large moves, they actually start influencing the real economy which they are suppose to predict. George Soros decribes this interaction in his Theory of Reflexivity [see speech to MIT Department of Economics]. .
So how much must markets rise before you know if a rally is for real or a fake? Many technicians believe the 1930 rally failed because the market did stay above the 200 day moving average. I'm a complete skeptic of most of what is known as technical analysis because they create all these indicators without the supporting evidence that they are accurate. But lets take 200 as a rule of thumb and the fact that when market indices are above the 200 day MA means that stocks are above the average buying price of the past 200 days - that might create some wealth effect and confidence from Soros' Theory of Reflexivity. The S&P500 and the DOW Jones Index(?) crossed the 200 day MA on Monday and the traders on CNBC were all very excited over this "confirmation" of the bull market. If you take out the chart of the Dow or S&P and put in the 200 day MA, this crossing of 200 day MA did market signal the start of many major bull markets. However, there were also periods when the index crossed it and did nothing for a few months - again the theory is not perfect and you can't bet your whole lifesavings on it.
One thing is certain - if the economy does not meet the rising expectations of investors, the selloff come really fast...in 2002, the market give up all the gains of a 6 months rally within 2 months...it fell 3 times faster than it rose. ...to make money you really had to get out faster than you got in....