The STT Guide for Understanding and Trading in a Bear Market (2024)

A bear market doesn’t last forever.

Why is this key to understand now? We’ve seen some crazy ups and downs this year…

A lot of traders have done well through it all, from the coronavirus crash to testing all-time highs.

We’ve been having an absolute ball inside theSteadyTrade Teammentorship community. And one thing we focus on is how to trade through any kind of market.

But a lot of traders worry … Will we have another bear market?

No one can say for sure or how long it might last. We have learned lessons from previous bear markets.

But I’m getting ahead of myself. First, let’s answer…

What Is a Bear Market?

To put it simply, a bear market is when the stock market’s down for a period of time. It’s usually when prices drop at least 20% off of recent highs.

There also tends to be a lot of pessimism among investors and traders.

If you look for bull and bear market definitions, you often find common metaphors — a bull charges ahead and a bear hibernates.

When that bull is charging, the whole market feels invincible — from day traders, institutional investors, analysts, and so on. When the bear hibernates, nearly everyone holds onto their money except prepared traders and short sellers.

What Determines a Bear Market?

Most people consider a bear market to be in effect when prices are down at least 20% over the whole market. If they’ve fallen in the 10%–20% range, it’s considered a correction.

These drops are determined from the market’s high to its lowest closing price. And it’s over when the opposite occurs.

How to Recognize a Bear Market

People often ask me, “Tim, are we in a bear market?”

What I tell them is to look around. You know you’re in a bear market when all the analysts talk about it. The pundits obsess over the S&P 500 going down. That can stop traders from trading and investors from investing … And that makes prices go down further.

In a bear market, there’s a lot of pessimism about the markets, and a lot of pundits predicting even more gloom and doom.

There are also other signs, like rising unemployment rates. And the surest sign — stocks are still down.

What Are the Phases of a Bear Market?

Bear markets typically occur in four steps. Let’s break it down.

Phase 1

In the first phase, we’re still in a healthy market. Stocks are priced well. Trader and investor confidence is positive and high. Somewhere along the way, people start to cash out of the markets. Maybe a catalyst like this year’s pandemic comes along and pushes the market into…

Phase 2

The second phase is where things can get ugly. Investors start to cut their losses and run.

Stock prices begin to fall sharply. Trading volume goes way down, and the economy starts to stagnate. Panic selling happens.

This phase is the only one with a proper name: ‘capitulation.’ But you might know it as ‘rock bottom.’

Phase 3

This is when the speculators come in. Maybe you’ve seen the effect new buyers can have when you buy off a panic, such as in a dip and rip.

But a morning panic isn’t like the kind that happens in a bear market. It can take a while for stocks to come back up, even if they’re undervalued.

Phase 4

In this phase, stocks are still dropping, but more slowly. And then, inevitably, they hit a point where people are willing to buy them again.

What’s a Bear Market Rally?

Often there are rallies between these phases, but they’re weaker than a new bull.

Of course, you won’t know this at the time. Looking back, you’ll see the movement of these rallies wasn’t the start of something bigger.

Stocks will climb during these rallies — 5% or more is the typical measure. Then they’ll fall back to depressed levels.

What Drives a Bear Market Rally?

Everyone wants to join the market’s recovery on the ground floor. A lot of speculators wait for exactly that and a discounted slice of a new bull market.

And that’s all that anybody’s talking about: “Are we still in a bear market?”

You’ll see that question a lot from pundits, in articles…

Meanwhile, some traders try to play both sides, riding the spikes and shorting the dips.

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Is it Good to Trade in a Bear Market Rally?

If you’re a short-term trader, you care about movement and volatility. Volatility is something you learn to love as a short-term trader. You’re not worried about how a stock will do five years from now. You’re more focused on the patterns it follows each day or week and the trades you can find.

I’d say that if you know what you’re doing, you can trade during a bear market rally. And it can potentially be a good time to trade if you can correctly identify it.

But I’ll also caution you to not assume that any recovery is only a temporary rally and get stuck in a short position. Especially now, shorting is dangerous.

What’s the Difference Between a Bull and Bear Market?

There’s one pretty big difference —stock prices.

Beyond that, there are all the things that go along with feelings of abundance and scarcity. Like I said, stock markets can have a pretty big impact on confidence. The raised confidence of a bull market and the desperation of a bear market tend to affect the economy as well.

Characteristics of Bull and Bear Markets

Bull and bear markets are the yin and yang of a market cycle. Thankfully, bull markets tend to last longer.

They’re two halves of a whole. The bull brings optimism while the bear brings pessimism. More employers hire in a bull market and make other investments as well.

And bear markets can lead to economic depression if they last long enough. Hiring freezes may come with them, if not layoffs.

Bull and bear markets don’t typically have one cause behind them. National events like 9/11 and the current coronavirus pandemic are the exception, not the rule.

Bear Market Examples

According toYardeni Research, the S&P 500 has been in bear market territory seven times in the past 50 years. There have also been several near misses, coming close to a 20% drop.

Some drops don’t last. For example, 2020’s bear market reached its floor in one month, before it started climbing again. But that’s not to say the market’s on solid footing now.

Example #1: 2007–2009

During the 2008 financial crisis, we had a 17-month bear market. It lasted from October 9, 2007 to March 9, 2009. From peak to trough, the S&P 500 was down 56.8%. Many people blamed it on the housing bubble, but a debt bubble and lack of consumer spending came into it too.

It didn’t just affect the U.S., either. Japan’s Nikkei index hit a 26-year low at the same point. After March 9, recovery was swift, with a new bull market emerging on March 26.

Example #2: 2000–2002

From 2000 to 2002, the S&P lost 49.1%.

Several bad things happened during this time. The dot-com bubble burst. The attacks of September 11 caused $40 billion in insurance losses. When that was all over, there was a further correction in March 2002.

It seemed like the bear market was over by the end of the year. But in March 2003, a further correction occurred, hitting the S&P with another 14.7% in losses.

Example #3: 1987

The original Black Monday is the reason that regulators introduced a trading curb. When stocks fell on October 19, 1987, there was no ‘circuit breaker’ to cool things off and stop panic selling. By the end of the day, the S&P had dropped 20.4%.

The crash affected 14 markets across the world with a decline greater than 20%. But in the U.S., it wasn’t that bad. The 1987 bear market wrapped up in just 202 calendar days. It’s one of the shortest bear markets on record. The average length of a bear market is 419 days.

Example #4: 1929–1932

This wasn’t the full extent of the S&P retreat of the 1930s, but it was the period of the most extreme losses. It didn’t technically span all four years. But it seems silly to not connect the 44.7% S&P loss of 1929 with the 83% it dipped from 1930–1932. By the end, it had lost 89% of its September 1929 value.

This is the worst-case scenario for a bear market. It unleashed an annual series of bear markets that lasted until 1942 through its damage to the economy and investor confidence.

How to Trade in a Bear Market

If trading in a bear market was easy, everyone would do it. And then we wouldn’t have any bear markets.

The basic thing you have to know is that trading through bear markets requires a mindset shift. You need to work with the market as it is, not how you want it to be.

How? Here are a few smart steps every trader should know…

Step #1: Widen Your Focus

Diversify your investments and trades. This way, you make sure that you’re not tied to any one or group of investment vehicles. Bear markets are unpredictable, and safe bets aren’t always safe.

You’re not only worried about how good a stock looks. You’ve got to think about how it looks to a lot of other people and institutions. And that’s never easy, especially when other traders are panicking.

Step #2: Focus on Essentials

The second thing that you can do in a bear market is to look at industries that are less likely to suffer. 2020’s bear market yielded opportunities in technology, pandemic-specific plays, and food delivery. These were key services for the at-home economy.

Step #3: Keep It Short Term

Some traders assume this means shorting. This can potentially be a high risk/reward strategy … But you’ve got to know the right way to short or things can get bad fast.

I wouldn’t advise shorting right now. This market has shown how traders can have just as much success going long.

Puts on the major indices could also be an option if you’re into options.

Day traders can practice judo on the market’s uncertainty with the dip and rip pattern. When a premarket gainer gaps down in the morning, traders may jump in. But go in with a plan. It can be risky if you don’t have the discipline to cut your losses and not overstay your gains.

Step #4: Wait It Out

Sometimes you just gotta be patient.

Keeping cash on hand is one way to do this. But if you want to play the market’s recovery, this isn’t really a strategy.

In a volatile market, you’ve got to pay attention. You should be keeping up with the news as it develops. Keep an eye on how the market is trending — not what the narrative of the trend is.

If being more patient means that you only make the really good trades, that’s OK. That’s what you should be doing anyway.

What Should You Invest in and Trade During a Bear Market?

The essential services I mentioned above aren’t the only ones that have been popping off. These bear market stocks have been amazing for prepared traders in the past few months. You have to know where to find plays. And as I say, it’s often a matter of what makes sense…

The electric vehicles (EV) sector has been hot. E-commerce, virus, and stay-at-home stocks were hot through the pandemic. OTCs and other penny stocks also saw a lot of action.

How Do People Get Rich in a Bear Market?

How do you spot the next hot sector? The hottest sectors, like the virus sector, are painfully obvious. It’s like a slap to the face — you can’t ignore it.

You’ve got to read the business news to know what’s going on in the world. Have a stock screener like StocksToTrade, which is specifically built to help you spot these sectors. And then focus on trading — keep notes, keep a database.

The best traders are always doing these things. That’s how you spot the next hot sector, profit, and become a consistent trader.

Frequently Asked Questions About Bear Markets

I get asked a lot of questions about bear markets, but they’re not rocket science. Here’s the run-down…

Why Is it Called a Bear Market?

This is a matter of debate. Bears hibernate. They paw downward and people don’t like bears (although I love them).

There was also a practice of selling bearskin IOUs among 19th-century traders. These middlemen would get their profits when the skins cost less than what they’d sold them for. And no one likes a middleman, so they became known as ‘bears.’ Or so the story goes.

Are We in a Bear Market Right Now?

There was a steep drop from February 19 to March 23, but we’ve been in a bull market since then. For months, people were unsure if this rise was a bear market rally or a new bull. But that was mainly because of the quickness of the decline.

Since March 23, the S&P has hit a new all-time high. But as of this writing, the market has been trending downward. Only time will tell if the market’s post-March recovery was for real.

Is a Bear Market Good or Bad?

Don’t believe what the so-called experts tell you. A bear market isn’t necessarily bad for trading or for the economy. Just because it’s a bear market doesn’t mean there won’t be opportunities, and it doesn’t mean it will lead to a recession.

I’m not exaggerating when I say that the summer was quite possibly the best trading market I’ve seen in my life. Our trading community cleaned up. It seemed like every day on Twitter, traders were tweeting about having their highest-ever profit days!

It’s not just about profits though. It’s about being involved in the market’s recovery alongside an awesome group of traders. If you want to get involved, we’ve got space on the Steady Trade Team. A rising tide should lift all ships, and that’s what we’re about.

How Long Do Bear Markets Last?

Post-1945, bear markets have lasted for an average of 14 months. Corrections have lasted five months. The average bear market is pretty much what we saw in 2020, 33%.

How to Survive a Bear Market

Don’t worry about what will happen in the future, instead focus on the here and now. Make your trades based upon what you see happening in the market today. 2020’s bear market led to some of the wildest trading opportunities I’ve ever seen.

Respond with curiosity, not fear, and prepare for the next one.

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Conclusion

I know it’s easier to talk about bear markets when they’re over. I also don’t want to see the market crash. But it’s useless to try to predict these things.

I try to think about bear markets as opportunities — for unexpected trades and for learning to be patient and disciplined.

There’s a reason most traders lose money, whether it’s a bull or bear market. They haven’t learned these things yet. When you focus on your education, you’re setting yourself for being a smart trader!

What’s been your best trade in the madness? Tell me in the comments below!