I continue to hear that our "aging bull market" continues to plod along, but the indices are falling relative to their high point in late January. What is the metric by which one determines the beginning of a bear market?
asked Mar 23, 2018 at 18:52
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2Unfortunately, by the time you know it's a bear market as defined by the 20% rule), you've given up a lot of portfolio value. IOW, the beginning of the bear market was 25% higher than the classic definition level.– Bob BaerkerCommented Mar 23, 2018 at 20:53
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@BobBaerker What marks the beginning of a bull market? And what if this happens right after the market drops 20%?– user12515Commented Mar 23, 2018 at 21:36
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@Michael Some define a bull market as a period of several months or years during which prices are consistently rising. Others define it as 20% up, similar to a bear being 20% down.– Bob BaerkerCommented Mar 23, 2018 at 22:33
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@BobBaerker Did a bit of searching, and it appears that another measure some use to define a bull market beginning is when the price reaches and exceeds the high point from which the 20% (for a bear) or 10% (for a correction) down was measured.– user12515Commented Mar 23, 2018 at 22:37
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3This question marks the beginning of a bear market. Or at least, that's what I'm claiming a year from now!– fabsproCommented Mar 24, 2018 at 5:38
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5 Answers
You can’t determine the beginning of a bear market at the time — if you could then it would immediately become a crash, as everyone would try to sell. It can only be determined retroactively, after the fact.
answered Mar 23, 2018 at 20:49
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This is a helpful insight, but it seems like a comment rather than an answer. Commented Mar 24, 2018 at 2:54
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@Fattie - as I have mentioned already a bear market is simply describing the direction of the market as going down - so what you are saying and what this answer is saying is that you cannot determine if and when the market is going up or down. That is why you are incorrect and why this answer is incorrect.– VictorCommented Mar 25, 2018 at 3:02
From Investopedia:
Although figures vary, a downturn of 20% or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over a two-month period is considered an entry into a bear market.
answered Mar 23, 2018 at 18:55
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While it's true that this is an often-mentioned "definition", of course the concept "know a bear market" is utterly meaningless. If you search on the internet "how does faster than light travel work?" you'll find many "definitions".– FattieCommented Mar 24, 2018 at 13:41
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@Fattie - in Technical Analysis there is only one definition of a bear market and when it officially begins. There may be other definitions but these are usually put up by Fundamental Analysts who don't really read price charts and so give it a % drop to define it.– VictorCommented Mar 24, 2018 at 22:41
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If you argue your point of view then you are saying that any definition in Technical Analysis is not a true definition.– VictorCommented Mar 24, 2018 at 22:44
I would like to say that there is no absolute method to identify the beginning of the bear market. What we can say is "Oh, It was bear market."
You will recognize it when you passed it
My method is paying attention to policymaker... In this circumstances, If THE FED keep raising Fund rate, we are in the good shape (raising rate means THE FED believe everything ok and economic can burden higher interest rate). Contrary, If THE FED reverse their current path and begin to cut the rate, and followed by massive sell off in the stock market, I will say It is the beginning of bear market
See DJIA chart at December 2007, THE FED cut their rate and you see bear coming
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something about recessions as well as inverted yield curves come to mind as well...– user12515Commented Mar 24, 2018 at 5:28
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In fact there is an absolute method to identify the beginning of a bear market - I will define it in my answer.– VictorCommented Mar 24, 2018 at 6:20
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You're going to be getting a nobel prize for this one, Victor. Commented Mar 24, 2018 at 6:43
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@Aerovistae only if it's one that you can't only use retroactively. Commented Mar 24, 2018 at 8:00
I'll try to explain it this way, OP:
You've probably heard people say sentences such as the following - this could be in conversation, or on one of the many "market" TV shows ...
"Wow, the market is tough just now."
"The markets are performing horribly today!"
"This whole year has been bad on the DOW."
"Market performance was poor this year."
"NASDAQ really sucked this year, it was tough."
(Conversely, there are any number of positive statements: "Last year was great on the markets." "NYSE was fantastic last year." "This year has been a great run so far." and so on.)
Consider those descriptive phrases such as:
is tough ...
performing horribly ...
has been bad ...
performance was poor ...
really sucked ...
Now - say you said "what is the definition of is tough , or performing horribly -? What marks the beginning of is tough , or performing horribly ?
I'm sure you can see, that question would be meaningless.
There's no "definition" or "beginning mark of" descriptive phrases such as is tough, performing horribly, really sucked and so on.
A "bear market" is - very simply - a descriptive term in English.
That's all there is to it.
Exactly like "poor", "excellent", "troubling", "challenging", "fantastic" and so on.
There is absolutely no definition or quantification of "bear market".
It's just a phrase (like "challenging", "difficult", etc).
Anything you're heard to the contrary is completely wrong.
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So are there definitions for uptrend and downtrend? Or are these just descriptive words as well? Because a bull market is basically an uptrend and a bear market is basically a downtrend. In fact the definition of bear (in market terms) is used to describe sellers in the market and bull is used to describe buyers in the market. So in more general market terms bull defines upward movements in price and bear defines downward movements in price. Bull and Bear do have actual definitions in the financial markets and more specifically in Technical Analysis.– VictorCommented Mar 24, 2018 at 22:26
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As I commented below your answer, yours is the only answer with any factual information. (Downvotes are irrelevant on this site.)– FattieCommented Mar 24, 2018 at 22:31
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Yes they are describing the state of the market and in Technical Analysis they have specific definitions for when they start and when they finish.– VictorCommented Mar 24, 2018 at 22:35
To find what the metric by which one determines the beginning of a bear market (or a bull market) you first need to understand what the uptrends and downtrends are. These are best understood by learning their definitions.
The definition of an uptrend is Higher Highs (HH) followed by Higher Lows (HL).
The definition of a downtrend is Lower Lows (LL) followed by Lower Highs (LH).
To understand what HH, HL, LL, and LH are, see the chart below:
A HH is a new peak higher than the previous peak. A HL is a new trough or low higher than the previous low. Similarly, a LL is a new low lower than the previous low, and a LH is a new peak lower than the previous peak.
See the price of a rising stock usually does not rise in a straight line over the long term, it generally goes up to a new higher peak (HH), down a bit to a HL, a low which is higher than the previous low, and then a new higher peak again (HH). So each proceeding highs is higher than the previous high and each proceeding low is higher than the previous low. This can be seen in the chart with HHs followed by new HHs and HLs followed by new HLs.
So what is the definition of the end of an uptrend (or as you have put it, the beginning of a bear market)?
The beginning of a bear market is defined by a LL (a lower trough below the previous HL) confirmed by a LH (a new peak which is below the previous peak). Once price moves below the LL (the horizontal orange line at the top-right corner of the chart at the low of the LL) this by definition is the beginning of a bear market.
Sometimes you may have a LH without a LL before it like in the chart. In this scenario, as soon as the price moves below the previous HL and makes a new LL this is the beginning of the bear market.
You might be asking what about the LL in August 2015, isn't the a break in the trend? By definition it isn't, because even though there was a LL it was then followed by a HH - which means that the uptrend continues.
Now the above chart is a weekly chart so it is showing the longer term trend. Depending on the time frame you are looking at the market might be in different trends at the same time. For example the chart above was clearly in an uptrend between July 2014 to July 2016 on the weekly chart, however, if we move down to a 30 minute chart between 1st Feb 2016 to 8th Feb 2016, we can clearly see that it is down-trending on this chart shown below.
So the weekly chart determines the trend for long term traders and investors, whilst the 30 minute chart would determine the much shorter trend for a day trader or other short term traders.
Note: The S&P500 made a LL on Feb 9, 2018 of 2532 and a LH on March 16, 2018. So if prices drop and close below 2532 next week it will be the beginning of the bear market (currently at 2588).
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1A trough can't be the beginning of a bear market, because it's already below the peak price. The bear market begins immediately after the peak price is achieved, but can't be identified as such until substantially later. Commented Mar 24, 2018 at 10:20
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@MikeScott - did you even read the definitions. These are the definitions of when an uptrend begins and ends and when a downtrend begins and ends. A bear market begins when a downtrend begins. These are the actual definitions.– VictorCommented Mar 24, 2018 at 10:34
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Did you invent those definitions, or take them from somewhere? Commented Mar 24, 2018 at 11:12
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@PaŭloEbermann - I have in no means invented these definitions, I learnt them from many books, courses and other forms of education. But just for you here is a link from Investopedia with the same/similar definitions.– VictorCommented Mar 24, 2018 at 11:42
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Whilst it is bizarre this was downvoted (as it at least contains plenty of good information), there is no "definition" of a bear market. It's just a descriptive phrase. Like saying "The market is great this year!" or "the market sucked last year!" It means: quite simply: utterly nothing. It's literally a simile for ...... "bad" ...... and that's it.– FattieCommented Mar 24, 2018 at 13:52