It's easy to spot a bear market rally after the fact, as you can analyze the data and say "Aha, this is the point when the market turned!" However, it's not particularly useful to spot a bear market after the fact. When possible, investors identify a pending bear market and adjust their portfolios accordingly to maximize success during the market downturn.
Look for the peak of the bull market.
The cyclical nature of the stock market dictates that bear markets always follow a bull market. Therefore, if you can become adept at spotting the peak of a bull market, you'll know that a bear market is just around the corner and can take the necessary steps to strengthen your position. A few signs that the bull market has reached its peak are: stocks inflated far beyond their value, high trading volume and increasing interest rates. The problem with spotting the peak of the bull market is that a bull market may exhibit these signs of peak for weeks, or even months, before a downturn. Too many people wait "just one more day" and find themselves caught in a downward slide.
Be alert for signs of market downturn.
Analysts disagree as to what ultimately constitutes signs of market downturn, but one way to spot a bear market is to chart it. By looking at a stock market chart, you can see the upward trends associated with a bull market or the downward trends that accompany a bear market. A stock market chart is a thing of peaks and valleys, but the key to the market lies in whether the peaks and valleys are trending upward, or downward. When the lows are becoming successively lower than recent lows, and the highs are becoming successively lower than prior highs, a bear market is emerging. Charts are most successful on a weekly or monthly basis, where you can evaluate large quantities of data without the constant daily spiking that just distracts analysis.
Stay abreast of business and economic news.
The national and world economies are leading factors in stock market success or failure, so staying abreast of economic news gives you a general alert when the stock market may be about to enter a decline, triggering a bear market. Generally speaking, by the time reporters distribute bad economic news, it's already too late to avoid a bear market. You must learn to analyze trends and act on business news that may influence the economy before any changes occur. If you're alert and have the time to monitor news sources diligently, you can spot potentially negative events and consolidate your position before it's too late.
Remember that spotting a bear market is always speculation.
It's easier to spot a bear market after we've entered one, so if you're trying to anticipate a bear market, remember that it's always speculation. Even the analysts get it wrong, so keep an eye on your long term goals and try not to sweat the short-term market fluctuations.
What is a bear market? At its very simplest definition, a bear market is official when stock prices decline 20 percent from a previous high. However, bear market implies that the market is experiencing a general downward trend, so a dramatic decline over a day of trading followed by a subsequent rally doesn't exactly qualify as a bear market.
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