What Is a Bear Market?

A bear stock market is evidenced by a sustained drop in a stock market index

What is a bear market? The standard bear market definition is a fall of 20 per cent in the relevant stock market index from the highest point reached.

A bear market analysis of the last 100 years or so would indicate that, going by this definition, the Dow Jones index would have fallen at least this much something like 15 times, with an average fall of the order of 40 percent!

Terms Related to What is a Bear Market

Some bear markets last longer than others. While most last less than two years, the standard bear market definition does not account for those bear markets that deliver no returns for much longer periods.

Bear markets that contain within them upward trends (rallies) of greater than 20 per cent, but which then drop to maintain a downward trend are called secular bear markets.

Rallies embedded in secular bear markets are referred to as stock market bear rallies.

The secular bear market can not be declared over until a sustained uptrend occurs in the market index that eclipses the previous market index high.

Bull markets on the other hand don't seem to be defined as precisely, as markets do tend to rise over time. While a rise of 20 percent or more in the market index may suggest a new bull market has commenced, there is no certainty that this is the case until the previous high has been passed.

To qualify as a bear market, the stock market index needs to fall longer than two months. Falls for less than two months are referred to as market corrections.

Where Are We in 2012?

Since the global financial crisis hit global share markets in 2007, some market have experienced strong rallies of up to 50 per cent that have since retreated and then rebounded. However, previous market index highs have not been regained.

It would appear to me that we are in the midst of a secular bear market that will continue for some time. How long? My guess is somewhere between two to 10 years from the beginning of 2012 - hopefully somewhere closer to two years!

Given the level of global debt and the amount of de-leveraging that needs to take place across financial institutions and governments in order to achieve more stable financial conditions, it would seem unlikely that investor optimism will return soon.

Destabilizing events such as a likely Greek government default, with contagion across other Eurozone countries will have the potential to destroy near-term rallies that may take place in the meantime.

Of course other potential global shocks such as a Israeli attack on Iranian nuclear facilities resulting on a disruption of global oil markets will not be a positive for world share markets.

Then there is the possibility of other unpredictable events, sometimes referred to as black swan events, that could cause havoc in jittery stock markets.

To Conclude

By now you may have concluded that I am a stock market bear with a somewhat pessimistic view of the mid-term future of stock markets.

While I normally take an optimistic view of the human condition, the level of investor despondency and the subsequent flight to defensive cash positions by a multitude of investors is likely to have a negative effect on global stock markets for some time.

Any global shocks of whatever kind in the meantime will most likely kill off any rallies that are generated by the more optimistic among us.

As a value investor, I have taken profits where I could and am adopting a shorter-term investing position in order to ride the next bear rally in the meantime.

But hopefully I have gone some way to answer the question "What is a bear market?".

And I also have tried to make it obvious that it is important when adopting a value investing perspective to be aware of where stock markets are headed, since the rewards that await when the next bull market kicks off will be great.

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