Bear markets are loosely defined as periods when markets experience declines in magnitude of 20% or more. More specifically, bear markets are a period in which a major index like the S&P 500, for example, declines by 20% or more, with this decline sustained for a period over two months or so.
Consequently, many investors become “bearish” – they lose confidence in the market, sell off their securities they do not believe will recover soon, and sit on the sidelines. There have been 25 bear markets since 1929, for an average of one every 3.4 years.
Investor sentiment does play a role in whether a bear market occurs and how long it lasts, and analysts can also use sentiment as an indicator of market phases. Typically, a bear market has four parts.
The first phase is marked by highs – in both prices and investor sentiment – before investors exit the market at a profit. This is followed by drops in prices and trade volumes, followed by investor unease at the declines. Next, speculative traders move in to capitalize on the lows, which boosts the market slightly; this is followed by a shift towards positive market sentiment as low prices entice investors back to the market.
Some investors look to capitalize on the opportunities bear markets present. Bear market funds, for example, are funds designed to profit when the market or sector they follow declines. Bear market funds exist for most sectors, industries, commodities, markets, or anything else that’s tradeable.
There are also 2X Bear Market Funds, 3X Bear Market Funds, and more, which use margin, short-selling, and derivative instruments to acquire large leveraged positions. The highly leveraged funds are only really meant to be held for a day or so. ETFs with similar structure may be more advantageous to the investor since they can trade intra-day. Investors can also short-sell shares when bearish on a stock in what is called a bear squeeze.
While most investors greatly prefer the bear market’s opposite, the bull market, bear markets can be advantageous to right trader. Understanding the causes and features of bear markets – including chart trends like the Descending Triangle and Rising Wedge – can help investors make rational, unemotional, and ultimately profitable decisions.
A covered call is when the writer or seller of a call option either owns the underlying security, or has a guarantee
Conventional wisdom says that investing in gold might be a good hedge against inflation or market cataclysms
Mortgage REITs are a type of Real Estate Investment Trust (REIT) which offers investors income distributions which...
The Dividend Discount Model (DDM) is a method for valuing a stock, that looks at expected future dividend payouts
EPS is derived by taking the net income of a company and dividing it by the share price. That gives an individual...
Gross Domestic Product (GDP) measures the production of all industries within a country, to overview the national economy
Foreign investment is the act of an individual, corp., or institutional investor, acquiring a large stake in a company
Leading indicators are economic or price data which have some degree of correlation with a movement in the market
Like a currency or interest rate swap, a commodity swap is a contractual agreement to trade one cash flow for another
Technical analysis is a method of evaluating the worth and probable future direction of security prices using charts...