Bear Market

The term “bear market” refers to a situation when there’s a significant decline in a market lasting for two months or more, which is characterized with price drops of more than 20%. It is also associated with general pessimistic attitudes of investors and other market participants, with a bleak view towards the near future.

A bear market often concerns the market situation in general, or the key indices experiencing huge declines due to external reasons, but separate securities might be in a bear market independently, if typical conditions such as rates of price decrease and an extended period of time are present. Bear markets often accompany challenging economic situations in certain countries or the world in general.

An opposite situation of a bear market is described by the term “bull market”, which denotes positive trends and investors’ sentiment in the market.

Bear Market essentials

Specific conditions of bear markets like its longevity and huge price decline are generally caused by the fact that prices reflect future expectations, and if a market situation doesn’t look positive to investors, they don’t naturally expect a miracle to happen, going on to act pessimistically and by doing so, they prolong the negative period. Their pessimistic views might be well-based and justified, but, in general, bear markets are often associated with panic and herding behavior, which worsen the overall situation.

The specific trait mentioned above refers to internal reasons of bear market qualities, while external causes triggering an occurrence of bear markets also exist. There is a wide range of possible reasons of a market decline, but in general bear markets are caused by economic problems in general, with their basis being military conflicts, pandemics, an overall slowing of the economy with the following stagnation, dramatic changes in geopolitics, and so on. 

Financial and economic events, especially those that bring huge disturbances in the society, but which are not directly connected with declining securities, might also trigger a bear market due to instability and fears they imply. Symptoms of economical stagnation may all lead to bear markets occurrence, with the most common of such symptoms being high unemployment rate, decreasing of business profits, low population income and high debts. Ant form of government meddling might also provoke a market reaction in a form of a bear market.

An important notion to the understanding of a bear market is that a 20% price decrease, which is considered to be a sign of a bear market, is not a strict precise number always needed to indicate that condition, but more of a guide mark. Bear markets are more strongly indicated by the investors’ general behavior. In case of a bear market, investors tend to minimize risky activity or avoid it completely, instead of it being cautious and reluctant to be involved in many kinds of activities.

How long Bear Market lasts

It’s commonly considered that a bear market takes place if a price decline and general market pessimism last for more than two months, with no actual further limit. A bear market might finish soon after it has started, taking all in all several weeks to come to an end, but there might be bear markets lasting for years and decades. Such a long bear market is sometimes called a secular bear market, and its main feature is consistently low profits from certain securities. In a secular bear market, a short-term price increase is possible, but it doesn’t result in any significant gains, and prices soon fall back to previous numbers.

Another note-worthy example is a cyclical bear market, which is a part of a market cycle, as its name indicates. In this case, a bear market might as well be a long period, but it also may be relatively short, depending on a cycle’s conditions.

Bear Market main stages

There are several key stages that might be identified during a bear market occurrence:

1. During the first stage, the prices are relatively high, and the general sentiment is positive, with a following decline starting to manifest in price decrease or other aspects. When market participants start noticing the upcoming change and investors begin selling their actives, the stage ends.
2. The second stage is characterized with dramatic decline of prices, and most of the economic indicators for certain securities or the market in general fall below average levels. Investors’ attitudes turn negative at this point, and sometimes a panic in the market is noticeable.
3. During the third stage, it’s possible for prices or trading volumes to start increasing gradually, often due to speculative activity.
4. At the final stage, prices might continue to fall, but way slower, and positive news and minor positive changes attract more participants and incentivize more activity in the market, signifying the upcoming end to the current bear market.

Ways of profiting and securing during Bear Markets

Although a bear market implies major inconveniences for investing and taking in profits, there are still some possibilities of speculation and receiving gains. The most popular way of doing so is a highly risky practice of short selling, which suggests borrowing shares from a broker, selling them with an expectation for their price to decrease, and then repurchasing the shares back at a lower price. Such a method might bring profits, but requires a thorough understanding of the market and some pure luck, as in case the price doesn’t decline, it’s still necessary to repurchase the shares, sometimes at a price much higher than the initial one, thus incurring huge losses. There are actually safer ways of acting during a bear market. 

Other popular ways of speculating or protecting long-term portfolios are the following:

• Put options, that provide a possibility without an obligation to sell a certain security at a stated price, which might turn in handy in case of harsh price declines. The disadvantage is that it’s hard to predict if such a situation actually happens, and there’s still a possibility of losses, although the losses from an expired put option is usually much lower than the loss of all profits because of lack of hedging.
• Inverse ETFs, which are a type of pooled investment security made up in such a way that its price moves in a different direction of the underlying securities price they are based on. It allows speculating and gaining profits during bear markets, although it’s also required to be carefully studied before being used.