Bear market12/28/2022 ![]() Fearing markets will drop even lower, anyone that was going to sell is panicking out of the market as the media paints a "sky is falling" narrative. Panic ensues as new lows are made, and bulls throw in the towel after many attempts to catch the bottom failed. Complacency kicks in as the market settles in a lower range that eventually breaks lower until the lows are broken. The market gradually continues lower despite bounces that tend to reverse at common peaks. However, the buying starts to wane again like déjà vu as sellers dump into the rallies again, but not as hard. In this final stage, bulls are cheerleading the resiliency of the rebound convinced the market is set to return to its old highs. Stage 3: The Capitulation and a Final Drop Every wave of selling hits a higher floor, which motivates buyers to get in before the last train leaves the station for higher ground. Eventually, the bulls rejoice and regain their muster and chase entries willing to pay up for a steady rally as they believe the bottom is finally in. The stock market begrudgingly grinds higher. Buying becomes more robust as the sell-offs are absorbed by dip buyers. The market stabilizes and miraculously the bounces continue to hold their gains. After so many bottom attempts, tired bulls aren't convinced or ready to jump in. ![]() This stage occurs after a new low is made and the rebound actually holds its ground. Heavy volume selling reaches a fever pitch as a near-term bottom is put in. Good news results in selling as bad news is catastrophic for stocks. Margin calls and forced liquidations cause large gaps down. Buyers go on strike and risk-off positions are taken across the board after a number of attempts to bounce have failed ushering in new lows. Bear market headlines hit the evening news warning of the impending recession causing workers to review their retirement portfolios as fund outflows increase. As stocks continue to fall, panic tends to take over as the magnitude of the selling increases causing investors to worry. Market drops make lower lows while bounces make lower highs, the definition of a downtrend. This begins the downtrend that ultimately materializes into a sell the bounce strategy. ![]() Eventually, the robust buying starts to thin out since each bounce rises to a lower high. ![]() FOMO kicks in on the initial drops to power a sharp bounce only to sell-off again. The buy the dip strategy that has been working for years suddenly starts wane as each bounce on a dip gets lower. The first stage tends to occur gradually after making all-time highs and speeds up and transparency materializes. We reviewed what to expect in a recession, now let's see what to expect on the stock market side and what to expect during the three stages of a bear market. The reason why bear markets last less than recessions is that markets tend to react first due to its forward looking nature while recessions are identified and labelled on lagging government GDP reports. Bear markets tend to foreshadow a recession. Bear markets last an average of just over a year while recessions last an average of 17 months, with the longest bear market lasting 630 days from 1973 to 1974. The dreaded bear market is technically defined as a period of (-20%) or more declines from its highs lasting at least 60 days. ![]()
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