How to know when a bear market is over
Following the stock market can feel like a whiplash: it’s down and depressing, then up and exciting, and back down. But if you’ve been a little observant over the past year, you’re probably aware that the general trend is negative and now is generally not a good time to review your investment account balances.
The S&P 500, one of the main indices for measuring the stock market, entered a bear market in June but seemed to rally recently, alongside gains in the Dow Jones Industrial Average and the Nasdaq Composite. The index is up 10% from its low last month, as of this writing.
Unfortunately, some analysts think it’s unlikely we’ve hit rock bottom yet, and these small glimmers of hope are nothing more than a sucker rally– a short-lived rally that attracts some buyers but quickly reverses course. So when does a rally turn into a rally, and how do you know when a bear market is about to exit?
How to know when a bear market is ending
The short and unsatisfying answer is that there is no definitive way to predict when a bear market will end or if an uptrend will continue.
“Trying to time the market is a wild ride, and it’s incredibly difficult to tell when a bear market is going to end,” says Matt Gray, Certified Financial Planner and Founder of AnthroFi Wealth Group in Colorado.
Gray explains that signs of people wanting to buy again, such as above-average trade counts and a positive market, indicate possibility, but even then buyer sentiment can fluctuate dramatically.
Longer rallies that last often require political or systemic changes, such as changes in interest rates or regulations. Compare that to short-term rallies, which are more likely to happen based on news and swings in consumer emotions.
It is also important to recognize that gatherings are relative: A a one-day or one-hour rise may be good news for a day-trader but has no significant effect on longer-term investments.
What is a bear market, anyway?
Strictly speaking, the termbear marketrefers to a 20% (or more) decline in the price of securities, such as stocks, from a recent high. The phrase is also used more broadly to indicate that the market has fallen enough to worry investors, Gray says.
Bear markets can last from a few weeks to a few months, years or decades. The shorter cycle characterizes a cyclical bear market, while the longer describes a secular bear market.
A bull market, on the other hand, is an extended period of rising prices – again, specifically defined as a 20% rise after two separate 20% declines. Bull markets can also last for months or years.
“Bear markets usually end before the economy improves, so there can be confusion as to why the market is going up when things look so bad,” Gray said. He also adds that bear markets are ultimately short-lived and provide buying opportunities.