This article on Bull Market or Bear Market is the opinion of Optimus Futures.
- Bull markets end when euphoria sets in while bear markets end with just when the retail crowd thinks it’s just begun.
- There are ways to measure the characteristics of a bear market, and its history is something that most traders are completely unaware of.
- It’s much easier to call the start of a bull market than the beginning of a bear market.
- There are a few technical tools you can use to anticipate a bear market’s reversal
Calling the end of a bull market or the beginning of a bear market is perhaps one of the trickiest things to do. Some analysts will say it’s nearly impossible to call, at least with any degree of accuracy.
But there are fundamental factors that can tell you whether you’re close to a negative reversal. Better yet, there are ways to confirm a bull or bear market.
Since every market has its own unique fundamentals, we’re going to focus specifically on stock index futures like the S&P 500 futures (ES, MES), Dow Jones futures (YM, MYM), and the Nasdaq 100 futures (NQ, MNQ).
A Bear Market or a Correction?
One of the more difficult things to distinguish is a mere “correction” from an actual “bear market.”
A bear market is a fundamentally driven decline of 20% or more. A correction, on the other hand, is a decline that’s less than 20%. In some cases, markets have plunged 20% only to reverse, meaning, it’s a correction disguised as a bear market.
So, how can you tell the difference? Here are a few tips to consider.
Bear markets typically don’t begin with a single massive plunge
What precedes most bear markets is not panic but euphoria and exuberance. Markets tend to “round off” before a sizable decline, countered by a smaller rally, and then followed by another decline. This continues until the market realizes its in a bear market.
Single events don’t trigger bear markets
A geopolitical event can cause the markets to plunge, but that alone will not necessarily trigger a bear market; just a sharp correction. A statement or decision by the Federal Reserve, or a negative economic report isn’t enough to trigger a bear. Here’s what typically causes bear markets…
Unforeseen negative fundamentals and market euphoria tends to wake the bear
When corporate earnings performance and economic conditions weaken while markets rally off optimistic sentiment—meaning, investors are not paying attention to all the “bad news”—then that’s when bear markets tend to start. But how do you confirm it?
What negative factors do most traders miss?
Corporate earnings across all eleven sectors of the economy are key. An industry can perform poorly, and so can a few sectors. But when a majority of sectors begin to underperform, watch out.
Revenue begins to get soft. Poor earnings can mean that a growing company is saddled with debt or chooses to bypass profit for business investment. But poor revenue growth, meaning underwhelming “sales,” is another thing.
Inverted yield curve. It’s hard to miss inverted yield curves since it tends to make news, but some traders don’t pay attention to the 2-year and 10-year treasury yields.
Demand falls amid high production and supply. When demand begins to fall while inventories are piling up, then there’s something wrong with the economic picture.
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What about market euphoria?
When is a market unreasonably euphoric versus reasonably optimistic?
Corporate debt is rising amid declining revenue. If a company is taking on debt despite poor sales performance, it’s a bad sign for that company. If this is a sector-wide condition, then it’s a bad sign for that sector, or the economy at large.
Leveraged buyouts are rising. Similar to the above, businesses are taking on debt, but this time, to buy rival companies. It’s okay if the company is doing well. Not okay if its revenue is falling.
Exceedingly bullish media. If you were watching financial media in 2007, you might remember how many so-called “market experts” were vehemently attacking any analyst who said that the housing market was about to crack. Media tends to be aggressively bullish in the months leading up to a bear market. So too might most analysts.
Everyone and their grandparents are talking about investments. The years leading up to crypto winters of 2018 and 2022, everyone was talking about Bitcoin and other cryptocurrencies. You could hear all the chatter at your local coffee shop, plane rides, grocery stores, and, of course, social media. Everyone was a financial expert. And when the crash happened, every self-proclaimed expert got mauled by the bear.
We saw this kind of euphoria during the tech boom in the 1990s. Less recently so in the stock market in the 2020s. Still, stock indices rallied amid high inflation data and a recession in the housing market.
Bear market means TRILLIONS in $ are knocked off global GDP
Take the amount of global GDP and subtract the market losses. Typically, a bear market in the US coincides with bear markets across the global economy. If you see trillions of dollars lost from the global GDP amount, chances are good that we’re seeing a bear market.
Watch for 2% monthly declines
During a bear market, markets tend to lose an average of 2% a month. The keyword here is “average.” But this reference measure is enough for you to assess the likelihood of a bear market.
Save the worst for last
Let’s divide a bear market into three parts. The first third of a bear market’s plunge happens during the first two-thirds of its decline. The last two-thirds of its decline—the big drop where investors are freaking out and selling almost all their holdings—happens during the last third of a bear market.
How long can a trader ride “short” a bear market?
If you’re looking to exploit a bear market by going short stock index futures, then remember that their durations tend to be shorter than bull markets. Between 1946 and 2020, the average bear market duration was 16 months.
The shortest bear market was in 2020 during the pandemic. It lasted 33 days. The longest took place between 1946 and 1949, three years.
ALSO Read | How to Read Bull and Bear Market Phases – Accumulation, Participation & Distribution
How much might the market decline during a bear market
If you’re wondering how much the market might have returned during a bear (again, assuming you’re short the market), the average, from 1946 to 2020, is -34%. The biggest loss took place during the 2008 financial crisis, where the S&P lost -57% of its value. But on average, -34% is the number to keep in mind.
Still, bull markets make it hard to find a bear
Why is it so hard to pinpoint a bear market? It’s because bull markets last longer and much higher than bear markets. While bear markets have an average duration of 16 months, bull markets have an average duration of over 57 months. While the average bear sees a loss of -34%, the average bull market sees a gain of over 149%.
Given the shorter duration of a bear market and the sharpness of its capitulation (where everybody panics), it’s much easier to call the beginning of a bull market than it is the start of a bear market.
And if you are interested in some technical strategies to anticipate market reversals, check out our article How to Spot Market Reversals.
The bottom line
Many traders willing to short the market dream of catching a bear market at its inception. Given the fundamental conditions explained above it’s much easier to catch a bull than a bear. And given our current economic conditions, one in which high inflation and a greater recession hang in the balance, it might be time to start preparing for the next expansion.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
