There are 2 ways to define a “bear market” vs a “bull market”.
In terms of investor psychology, a bear market is “prolonged period of falling market prices in which the downwards decline becomes a self-fulfilling prophecy”. This means that there is widespread pessimism among investors and traders. Investors/traders sell because they expect prices to fall. Prices fall, so investors/traders expect prices to fall even more. They sell, then prices fall even more. It’s a vicious cycle.
This means that the market’s medium-long term trend is going down even though there may be bear market rallies along the way. Bear markets are characterized by:
The key phrase here is that prices are trending lower in a bear market. But how do you define this concisely? How much do prices need to fall for it to be a bear market? How long do prices need to go down for? A TIME definition is just as important as a MAGNITUDE definition.
That’s where the quantitative method comes in. The generally accepted definition of a “bear market” is a decrease of 20% or more for the stock market that lasts at least 2 months from top to bottom.
*Other markets define this differently. For a highly volatile market like silver, a 20% decline is merely a “correction” and not a bear market. The stock market is less volatile than commodities.
Problem with the standard definition of a bear market
I don’t like it when the conventional wisdom defines a “bear market” as a 20% decrease in prices.
Why 20%? Why not 21% Why not 19%? Why not 18%? Why not 25%?
This is a silly technicality that many investors and traders seem to get caught up in. They consider the 2011 stock market decline to be just a correction because the S&P fell 19.3% when you use the CLOSE prices. But the S&P fell 21% when you use the HIGH and LOW prices. They don’t consider this a “bear market” on the mere account of 0.7%.
