What Is A Bear Market?

In the world of finances, and particularly of stock-market investing, two terms dominate all conversation: bull, and bear. These terms, of course, do not refer to the actual animals, but are the standard terms that indicate whether conditions in the market are positive (bull) or negative (bear). It is said the bull and the bear have been chosen to symbolise the movement of the financial markets on account of each animal’s manner of attack: a bull raising its head to spear its prey with its horn signifies rising market prices; while a bear that strikes its enemy down with a swipe of its paw indicates falling price levels.

Should You Be On The Run?

A bear market develops when the overall prices of securities enter into a long-term decline, and tends to develop during times of economic recession, high unemployment levels, and rising inflation rates. When investors perceive prolonged drops in market prices amidst economic turmoil, they begin to lose faith in the market and sell their assets to prevent losses from further decline. When investors begin selling en masse, however, they drive demand down. When demand is down asset prices fall to even lower levels and further deepen the pessimism in the market as investors begin to fear greater losses. Market sentiment plays an important role in breaking or sustaining the cycle of lower-demand-lower-prices that feeds a bear market and should be monitored closely.

Although the terms bull and bear are widely used in financial circles to characterize general positive or negative positions in the market, the savvy trader should practice some caution. Technically speaking, there is no official rule about when a market changes from a bull into a bear. In practice, however, the generally accepted consensus is that a market becomes a bear market when prices decline to a measure of 20 percent or more in various broad market indices for a period of at least two months. The two-month time limit distinguishes a true bear market from a correction, which is a short-term downward trend that does not extend over two months. Short drops, therefore, do not make for real bears, but may only indicate bearish tendencies in the market.