E What Exactly Is Bear Market Territory?

We’ve heard a lot about how the market touched bear market territory this month but is knowledge of any use for investors?

I must admit that I wanted to rant about all the punditry surrounding “correction territory” and “bear market territory” we’ve heard recently as the stock market closes out what was a rather sucky year. After several years of full-speed-ahead bull market action, 2018 started with confidence and ended with volatility.

But then I dove into the data and found something actually useful.

As stock prices fell, the media, fueled by Wall Street pundits, barraged us with all sorts of “terrible” warnings from Hindenburg Omens to Death Crosses. And now, with the Standard & Poor’s 500 down about 20% from its late September peak, the word is that the market “has entered bear market territory.”

Bear Markets Defined

Ask a TV journalist what defines a bear market and they will tell you it is a decline of 20% or more from a recent peak.

The problem is with that is it is totally an exercise in hindsight. It tells you nothing about what the market condition is now and where it might go from here.

Ask a market technician what defines a bear market and they will give you a more subjective answer. Mine is that a bear market is a major trend to the downside, no matter what percentage is already lost.

Is that helpful? Well, not yet.

Next, it is my responsibility to lay out what constitutes a “major trend to the downside.” Perhaps it is when the market crosses below its 200-day average. Or when the 200-day average itself is falling, as determined by, say, the 50-day rate of change. Or when the market makes its first set of lower highs and lower lows.

The latter is actually one definition of a falling trend. But are any of these enough to declare “bear market?” Or do we need even more qualifiers, including those averages, or perhaps a sell signal given by the bullish percent index? I’m intentionally not defining that indicator because that is not the point.

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Disclosure: No positions in anything covered.

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