What Is A #Bear #Market?

People often ask what the common stock market terminology of bullish or bearish means.  While these have standard meanings in normal speech — bullish being positive or optimistic, and bearish being the opposite — at least the term “bear market” has a precise technical definition in the arena of stocks.  I will explain this here.

The formal definition of a bear market is a market that has declined 20%.

brown bear in body of water during daytime
Photo by Pixabay on Pexels.com

The first item to clear up on the way to understanding the definition is “what do we mean by a market?”  Normally people will be talking about a particular stock market index, such as for example the Dow Jones Industrial Average (“DJIA”), the S&P 500 or the Nikkei-225 (“N-225”).  So now we want to know what a stock market index is.

Individual shares go up and down all the time.  One cannot say what is happening in more broad terms to “the market” by looking at single shares because of this volatility.  So instead, one looks at a basket of shares.  That is what an index is: a basket of shares listed in a specific location.  There are thousand of these, and they can be selected in many different ways.  

To illustrate this, the DJIA is a basket of 30 major US shares that are selected so that they represent a good spread of major US stocks in different sectors such as computers, aircraft manufacture and banking.  The S&P 500 is a broader basket of shares issued by the 500 largest public companies listed in the US.  The N-225 is somewhat different as it is made up of the 225 largest stocks listed in Tokyo.  It is price weighted, meaning that more expensive stocks will be more heavily influential in the movement of the index.

So, put simply, if all of the component stocks in the DJIA go down 20% in a period, the whole index will also go down 20% over that time.  Since this index and the others are a broader measure of market sentiment than any single stock, if the DJIA goes down 20% in a period, we can say that it was a bearish episode for the market.  Since that is an approximate measure of the health of blue chip US equities, one would also be justified in saying that that period was a bearish period more generally for major US companies.

The DJIA has been published since 1896.  The graph looks like a long uptrend punctuated by occasional bear markets.  You can see this below.

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People tend to talk less about the technical definition of a bull market — they will often use it more colloquially to just mean “stocks are going up.”  But if one wanted to be precise, it would just be the opposite of a bear market.  It would mean that a particular index had increased by 20% from a trough.

See Also:

The Psychology of Successful Trading: see clip below of me explaining my new book!

Why #Value Investors Should Buy #Bank Stocks

What Is “Theory Of Mind?”

Cognitive Biases And How They Affect Stock Markets

Author: Tim Short

I am a former investment banking and securitisation specialist, having spent nearly a decade on the trading floor of several international investment banks. Throughout my career, I worked closely with syndicate/traders in order to establish the types of paper which would trade well and gained significant and broad experience in financial markets. Many people have trading experience similar to the above. What marks me out is what I did next. I decided to pursue my interest in philosophy at Doctoral level, specialising in the psychology of how we predict and explain the behaviour of others, and in particular, the errors or biases we are prone to in that process. I have used my experience to write The Psychology of Successful Trading. In this book, I combine the above experience and knowledge to show how biases can lead to inaccurate predictions of the behaviour of other market participants, and how remedying those biases can lead to better predictions and major profits. Learn more on the About Me page.

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