What investors must know about three stages of bear market | Stock Market News (2024)
A bear market is typically defined as a market that falls more than 20% from its most recent peak. According to Wall Street veteran Bob Farrell, who combined technical analysis with various measures of investor sentiment, a bear market has three stages—sharp down, reflexive rebound, and drawn-out fundamental downtrend. This is part of Farrell’s widely distributed work – ‘10 Market Rules to Remember’ published as part of a report in 1998.
Farrell’s rule on the bear market denotes that it starts with a sharp correction, followed by intermittent bounce-backs as some of the investors see the correction as a buying opportunity. This phase of the bear market, termed the ‘reflexive rebound’, is followed by a prolonged period of the downtrend in markets, typically for over a year.
This is a universal tenet of bear markets in technical analysis and it applies to every market in the world including India, said Vijay L Bhambwani, Head of Research, Behavioural Technical Analysis, Equitymaster.
To put these three stages in perspective, QED Capital PMS provided a graphical illustration (see chart) for some of the past bear periods in India.
Let’s take the period 1997-1999, during which Indian markets were impacted by the Asian Currency Crisis. The BSE Sensex Index dropped by 25% in the six-month period ended January 1998. This was followed by a rebound of 24% from its lows by April 1998. After that, it was only in July 1999—almost after two yearssince the beginning of the bear market—that the index touched its previous peak.
Where are we now?
The Indian markets have been in a correction phase for the last couple of months—the S&P BSE Sensex, S&P BSE Mid-cap and S&P BSE Small-cap indices have fallen by 9.8%, 15.6% and 12.8%, respectively from the peak seen in October 2021. The Indian markets, as a whole, are not in an outright bear market but have higher chances to witness one, as per experts, given the macroeconomic conditions and geopolitical tensions.
The lesson from Farrell’s three stages of a bear market is that a rebound after a sharp correction may not be a sign of the end of the market sell-off, and bear markets could stay for multiple years.
The bear market from January2020 through March 2020on the back of a pandemic was very short-lived and can be considered an aberration. Investors are advised not to expect a repeat of the performance of the equity markets witnessed in 2020 and 2021.
Investors need to note that returns from the equity asset class, going ahead, could be highly volatile and modest in the short term. “The long-term returns from markets are not going to change. For India, it has been somewhere around 12-15% per annum on average. Some pockets of the market such as mid-cap and small-cap have delivered 40-50% returns in the last year, which is nothing but borrowing the returns from the future. Now, the markets may enter into a consolidation phase, during which we could either see a price correction with intermittent rebounds or time correction, in which markets stay sideways for a long period without significant movement either on the upside or on the downside,” said Anish Teli of QED Capital Advisors LLP.
Experts suggest long-term investors to focus on the asset allocation strategy than on the bullishness or bearishness of the markets. “Markets move in cycles, generally following the underlying economy. In the long-term, the true fundamental value of stocks plays out, making cyclical movements almost redundant. For long-term investors, it would be better to focus on asset allocation strategy and let that drive their investment decisions,” said Anupama Sharma, executive director, IIFL Wealth.
A bear market is typically defined as a market that falls more than 20% from its most recent peak. According to Wall Street veteran Bob Farrell, who combined technical analysis with various measures of investor sentiment, a bear market has three stages—sharp down, reflexive rebound, and drawn-out fundamental downtrend.
Do you ever feel the sudden urge to purchase a stock when it sharply drops? Many investors are often tempted to do so as they see an opportunity to buy at a lower price. However, the 3-day rule advises investors to wait for a full 3 days before buying shares of the stock.
Bear markets are characterized by investors' pessimism and low confidence. During a bear market, investors often seem to ignore any good news and keep selling investments, which pushes prices even lower. Eventually, investors begin to find stocks attractively priced and start buying, officially ending the bear market.
Bear markets occur when prices in a market decline by more than 20%, often accompanied by negative investor sentiment and a weakening economy. Bear markets can be cyclical or longer-term. The former lasts for several weeks or a couple of months and the latter can last for several years or even decades.
Minimum Inventory Levels. Also known as safety stock, minimum inventory levels are the least amount of stock a business must maintain to avoid stockouts and consequent lost sales. ...
The three phases of primary trends are the accumulation phase, trending phase, and distribution phase. The three types of reversal formations are failure swings, non-failure swings, and double tops/bottoms.
The 3-5-7 rule is a simple approach to managing your trades. Here's how it works: as your trade gains value, you take profits at three different levels—3%, 5%, and 7%. This method helps you lock in profits gradually, instead of waiting and hoping for a bigger win that might never come.
The Nifty 50 3-30 formula is a simple rule of thumb used in stock market investing. It suggests that investors should have a diversified portfolio of at least 30 stocks, with no more than 3% of their portfolio invested in any one stock.
It can be good to buy in a bear market. Investing involves buying low and selling high, but it is impossible to predict market highs and lows. You may buy a depressed asset in a bear market only to watch the price fall even further.
Bonds — Bonds typically provide lower rates of returns than stocks on average but are usually less volatile and safer. Investing in bonds may help hedge your portfolio against the ups and downs of the stock market. Cash — This can include savings deposits, certificates of deposit and money market accounts.
Selling off all your stocks after seeing red in your portfolio during a bear market is the last thing you want to do. Volatility is scary, especially if you are risk averse, but running with the volatility wave is key and beneficial to the success of your long-term portfolio.
“Investors who remain even keeled and disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals.”
The longest bear market lingered for three years, from 1946 to 1949. Taking the past 12 bear markets into consideration, the average length of a bear market is about 14 months. How bad has the average bear been? The shallowest bear market loss took place in 1990, when the S&P 500 lost around 20%.
The duration of bear markets can vary, but on average, they last approximately 289 days, equivalent to around nine and a half months. It's important to note that there's no way to predict the timing of a bear market with complete certainty, and history shows that the average bear market length can vary significantly.
There are four phases of the stock cycle: accumulation; markup; distribution; and markdown. The stock cycle is based on perceived cash flows into and out of securities by large financial institutions.
Generally, a trade cycle is composed of four phases – depression, recovery, prosperity and recession. Depression: During depression, the level of economic activity is extremely low. Real income production, employment, prices, profit etc.
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