Is the Stock Market Entering Bear Territory?

 

A Bear Market is when the stock price declines by 20 percent or more. This happens during periods of investing fear or recession. Once the index has declined by 20 percent, it is considered to be in Bear territory. You can determine if the market is entering bear territory by determining its phase. Bear markets tend to last for a long period of time, ranging anywhere from one to three years. Depending on the index, you may even see a bear market at a single day or over several days.

Phases of a bear market

The last couple of months in US markets have seen the markets in a correction phase. The S&P BSE Sensex, Mid-cap index, and Small-cap index have all declined from their October 2021 highs. Although not in a bear market, US markets are currently experiencing a period of geopolitical tension and macroeconomic conditions. Whether markets are about to enter a bear market or not, it is important to monitor and understand the phases of a bear market.

The first phase of a bear market is the correction phase. This phase is relatively mild and occurs before the full recognition of the market's weakness begins. Major financial institutions, such as banks, start to turn to lower-risk sectors such as health care and utilities. Analysts begin to talk about yield, dividends, and fixed income. Investors begin to shy away from more aggressive sectors such as technology. Many firms forecast the DOW to fall to 4,000 before it ended. The DOW did bottom out at a low of 6500, which was still a significant loss, but the market did not reach this point until several months later.

In the capitulation phase, prices of many stocks continue to drop, although their intensity is lessened as more buyers enter the market. Eventually, prices of stocks begin to recover, signaling the beginning of a bull market. A bear market may continue for years, so a good strategy is to ride the highs and lows of the market over time. The three phases of a bear market are defined by a downward trend in security prices for at least two months. Some of the factors that make a market bearish include decreased stock prices, investor pessimism, and general economic recession.

20 percent trigger for a bear market

A bear market is defined as a sustained decline in stock prices below their most recent high. Historically, a bear market occurs when stocks have declined 20% from their recent high. In January, the S&P 500 fell 20%. Since then, it has fallen another 19 percent. A bear market is often preceded by a period of strong economic growth and low interest rates. Despite this trend, the market is still overbought and has yet to reach its 20 percent trigger.

Traders must avoid fear of missing out. In a bear market, a trader may have stalked a support level for days, missed the bounce off that level, and then impulsively chased an entry. In a bear market, gains on the long side are short, because bids evaporate once support falls. Then, traders may stop out again. Avoid impulse trades by setting alerts and trading only when you are sure of a price trend.

Other triggers of a bear market include changes in federal funds rates, tax rates, and investor confidence. When investors fear something is going to happen, they will begin selling their stocks in order to avoid losses. If the market falls 20%, a bear market will occur. If a bear market occurs, stocks will continue to fall until they reach this threshold. That trigger is usually around 20 percent. And bear markets last 1.3 years.

Average length of a bear market

While every bull market lasts a minimum of five years, bear markets last on average one year and nine months. Bear markets can last much shorter, ranging anywhere from a few weeks to several months. The average bear market is considerably shorter than the preceding bull market, which lasted an average of eight years. This is good news for investors who haven't gotten out of their stocks during a bull market.

Historically, a bear market lasts about 9.5 months. These market declines are roughly 3.5 years apart, but this doesn't mean that they're necessarily long. Bear markets have ended almost three years before, but there have been exceptions, and the longest one, the Great Depression of 1929, lasted four years. The stock market's 1929 crash, which wiped 89% off of the Dow Jones Industrial Average in less than three years, ushered in the Great Depression. That crash, which was largely caused by the Smoot-Hawley Tariff Act, forced the Federal Reserve to impose restrictive monetary policy.

The average length of a bear market differs by country. In the U.S., bear markets began in December 1961 and ended in June 1962. In 1966, the bear market lasted nine months. The one that began in January 1967 and ended in August 1968 was nearly 20 months long. Then in 1980, the bear market lasted twenty-one months. In 1990, the bear market lasted just over three months, and in 2007, it was two months long. In 2000, the bear market began in January 2000 and lasted until October 2002.