Financial markets over a period of time have a perceived tendency to go in one direction which is known as Market Trend. Traders identify these market trends to understand how that particular economy is going towards a bear market or bull market. And based on these trends they invest, buy stocks, bonds, etc. This financial market trend is mainly categorized into two categories, they are:
- Bear Market (the economy which is going downward) and
- Bull Market (the economy which is seeing an upward trend).
Here Bear and Bull are used as a symbol. Bear when attacks have a downward-looking stance that’s why bear symbolizes declining economy. Whereas a Bull attacks with an uprising stance with its horns pointing towards the sky, that is why Bull symbolizes the rising market. Read more economics topics here
What is Bear Market?
A bear market is when an investment’s price falls below its 52-week peak by at least 20 percent or more. It is a cumulative stock market downturn over a period of time. It requires a shift from strong investor optimism to widespread investor pessimism and fear. A generally accepted measure of this type of market is a price decrease of 20 percent or more over a period of at least two months.
A lower 10-20 percent fall is called a correction. As stocks rebound, the bear markets end and new highs hit. The bear market, then, is retrospectively measured from the recent highs to the lowest closing price. And its period of stabilization is the lowest closing price to new highs. Another widely recognized end to it is a 20 percent increase from its weak index.
In any asset class Bear Market can happen. It can happen in indexes like Dow Jones, S&P 500, NASDAQ. It can also happen in bonds such as Treasuries, corporate bonds. It can also happen in Oil (commodities), currencies or gold.
Why does Bear Market happen?
- It is caused by a lack of trust among investors, companies, and consumers.
- When trust is dwindling, so is demand.
- A stock market collapse can cause a loss of confidence.
- This happens when stock prices dropped by 10 percent within days.
- Crashes are risky as only about 10 percent of stocks have to fall to start this type of market.
Examples of Bear Market
- During the great depression of the 1930s Dow Jones Industrial Average was erased by 89 percent which in turn simply created the United States Economy.
- The Chinese stock market crash of 2015 has also been a bear market.
- The bear market of 2008 started on 9 Oct 2007, when the Dow closed at 14k points. It dropped 53.4 percent on March 6, 2009, to close at 6k level. This was caused by the stock market crash of 2008.
- Another major incident happened in the year 2000 when dow jones started falling and hit the bottom in 2002 when it fell over 37 percent.
What is Depression? Difference between Recession and Depression Read more on market trend here