Bear Market Definition, Effects and Chart Example

Bear Market Definition

A bear market is occurs when an major index experiences a drop of 20% or greater from its most recent high point.  Beyond just the price movement, a bear market also has a time component associated with the move.  This time requirement is that the sell off should last longer than two months.  There are exceptions to this rule, as in 1987, the market crashed in a matter of days, but the market stayed at extremely low levels for longer than two months. 

Effects of a Bear Market

Bear markets are accompanied with enormous pessimism and fear in the market.  These fears will manifest themselves in less consumer spending, job losses and newspaper headlines that read of utter destruction.  

Loss of Retirement Funds

Beyond the price movement of a bear market, it has real implications with Main Street America.  For starters many 401ks, if not properly allocated will take major hits.  This fact is playing out in the 2008 credit crisis as many Americans are now forced to push their retirement dates out anywhere from 3 to  5 years.

Job losses

As companies notice a reduction in earnings, they are forced to make cuts across the board, which often comes in the loss of jobs.  This in turn leads to more foreclosures and bankruptcy filings.  Sadly, beyond the financial losses, it also leads to an increase in divorces.

Fear of the Market

As a result of losses suffered during a bear market, many investors will avoid investing in the stock market all together.  This is one of the biggest tragedies, because it has been proven that over the long haul, investing in the stock market produces better returns than bonds or real estate.

Notable Bear Markets

Some of the most widely known bear markets are 1929, 1932, 1987, 2001 and now 2008.  While all of these sell offs produced 30% or more drops in the market, they all were able to recover and move onto new highs.  Time will tell if the credit crisis of 2008 can continue in this market tradition.

Bear Market Rally

A bear market rally can occur within the context of a bear market.  These rallies will materialize often times out of nowhere and will send the major indices on 10% to 20% rallies in a matter of weeks.  This is why picking a bear market bottom is so difficult.  Right when the world appears to becoming to an end, a sharp rally will ensue as a result of the imbalance of shorts and panic selling in the market.  The question then becomes is this rally the beginning of a new bull market, or just a dead cat bounce?  Its always a good idea to take some money off the table after such an up move, because if it is the start of something real, you still have money in the market and in the event the market rolls, you were able to book some profits.

Bear Market Chart Example

Below is a chart example of the 2008 credit crisis where the Dow dropped over 30% in a year. 

Bear Market
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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