What is a Bear Market?

What is a bear market: the 20 percent guideline.
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. A dramatic decline in trading over a short period of time is called a market correction, not a bear market. Because of this distinction, analysts qualify a bear market as a decline of 20 percent or more for a period of at least two months.

A bear market doesn't stop at 20 percent.
While the stock market must decline at least 20 percent to be considered a bear, most bear markets don't bottom out at 20 percent. Historically, bear markets tend to decline anywhere from 40-50 percent before rebounding. However, bear markets always rebound, so the key to investing successfully in a bear market is to choose stocks that can weather the bear and realize significant profits when the market rebounds.

What is a bear market: the spirit of pessimism.
Bear markets aren't just about the numbers; most analysts agree that a bear market embodies a spirit of pessimism. During market corrections, most investors think the market is going to improve quickly and they don't lose confidence. However, during a bear market, investors turn to a spirit of pessimism, and this very spirit of pessimism typically increases the length and the depth of a bear market. When investors are pessimistic, they don't spend as much and may even sell, and then the market becomes flooded with stocks that few people are buying. This further lowers stock prices and deepens the bear market. The spirit of pessimism surrounding a bear market creates a vicious cycle of selling and stock prices dropping.

How long does a bear market last?
Bear markets are all about trends. During a bear market, stocks trend downward; they may still rally for a day, but the rally is lower than the last rally, and the low point is even lower than the last low. While bear markets may be as short as a few months or as long as 11 years, as during the 70's and 80's, bear markets average approximately 16 months.

Spotting the bottom of a bear market.
Investors that want to make a bundle often try to spot the bottom of a bear market, when they can buy stocks at their lowest prices and realize tremendous profits when the market rebounds. Spotting the bottom of a bear market is a challenge, though. You can use what you know about bear markets to try to spot the bottom; if a bear market is at a 32 percent decline, it probably hasn't reached the bottom, which is traditionally 40-50 percent. Likewise, if a bear market has lasted for eight months, you're probably looking at several more months before the bear market hits bottom.