A huge losses of the major stock market index of 20% or more from its peak over a two-month period is considered an entry into a bear market. A downtrend may also take an extended amount of time from months to years.
The term “bear market” is the opposite of a “bull market,” or a market in which prices for stocks are rising or will expect to rise. It is named for the way in which a bear attacks— pounding its paws downward. This is why markets with falling stock prices are called bear markets. Just like the bear market, the bull market is named after the way in which the bull attacks by thrusting its horns up into the air.
1. If the 20% downtrend lasts less than two months, it’s considered a correction instead of a bear market.
A sudden drop of price is considered unsustainable and investor can then use the opportunity to buy stocks at a discount. Sometimes, it might just cause by a sudden negative economic news that is deemed to have short-term effect.
A 45 degrees downtrend is considered the most strong downtrend that can last a long time from months to years. It can also be applied to a single stock. A slow and continuous downtrend can result to a huge amount of losses because it can take time and can lead to various false signs of reversals.
Too steep (green)- unsustainable
45 degrees (red)- strong downtrend
20 degrees (yellow)- weak
2. Like earthquakes, bear markets can be relatively mild or quite harsh.
The average bear-market loss was 35%. The smallest loss was 21% in 1949; the worst was a drop of 62% from November 1931 to June 1932. Bear market can lead to a stock market crash which have already happened in the past.
The magnitude of the downtrend of a larger markets like in the United States can affect other smaller markets worldwide, especially to emerging markets like our Philippine index and other Asian markets.
3. Bear market scared investors who aren’t prepared for it.
Millions of investors are still nervously on the sidelines following the famous stock market decline of 2008. By remaining in cash, they have missed-out on a strong, sustained recovery.
Many people have turned their backs in the stock market after experiencing huge losses thinking that they won’t recoup their money, only to find out later that others have already experienced good returns after it bounced back.
4. Bearish markets are normal, but not superior.
Over the past 200 years, the stock market has risen more than it has declined. The bear accounts for only a minority of the history of the market — but that small part is pretty unpleasant and stressful. Stock market has been always in favor of an uptrend and people like to see prices going-up. The bull always wins!
5. Young millennials should welcome the bearish market.
Young investors are blessed with lots of time. They need the long-term growth that results from buying stocks when they are less expensive so they can sell them when they’re worth much more.
A bear market makes stocks temporarily less expensive; this is when young investors should be buying all they can. That’s why I always tell people especially if they are still young to invest on more aggressive investments because the time is their advantage which some people do not have.
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