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?
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.
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
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.
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).