The Illustrated Guide to Bull and Bear Markets
“Bull Market” and “Bear Market” are common financial terms and it’s important for investors to know what they mean. The short definitions:
- A Bull Market is a 20% or greater gain from a previous stock market low.
- A Bear Market is a 20% or greater loss from a previous stock market high.
The table below illustrates Bull and Bear Markets during the first five months of 2020.
Bear Markets have three key days, illustrated above:
- The day the Bear Market begins
- The day the decline finally reaches 20% (the earliest we know it is a Bear Market
- The day it ends.
Bull Markets also have three key days: beginning, reaches 20% gain, ends.
The Bull Market that began in 2009 continued until February 19 of 2020. That made it the longest in U.S. history. There were many declines -- but no 20% or greater decline -- during the eleven-year Bull Market.
Then, the eleven-year Bull Market became a Bear Market in the shortest period ever recorded. Officially, it became a Bear on March 12, when it had declined 20% from the February peak.
Eleven days later, another Bull Market began, as S&P 500 funds increased 20% in only two weeks.
Wow. We were not even halfway through 2020 and had already gone from Bull to Bear to Bull.
Bear Market Rally
We also saw multiple examples of “Bear Market rallies,” a short-term increase in stock prices during a longer-term Bear Market. The rally appears to be the end of the Bear Market but is not. The rally ends before there is a 20% gain and then the market continues to decline past the level where the rally began.
According to Investopedia.com, “every Bear Market has spawned at least one rally of 5 percent or more before the market corrects. Two-thirds of the 21 Bear Markets that occurred between 1901 and 2015 experienced rallies of 10 percent or more.”
There were three Bear Market rallies before the current Bull Market began. They ranged from 5.9% to 9.3% and only lasted a day.
Bear Market rallies make it difficult to time the markets. Only after the rally either ends or continues and creates a new Bull Market do we know whether it was a temporary fluctuation or the end of the decline.
Bear Markets, Bull Markets and Bear Market rallies can only be judged and named in retrospect, after they have occurred. By the time we know, it is usually too late to profit from the information.