As of 01/27/2023
  Indus: 33,978 +28.67 +0.1%  
  Trans: 14,483 +191.14 +1.3%  
  Utils: 968 +1.08 +0.1%  
  Nasdaq: 11,622 +109.30 +0.9%  
  S&P 500: 4,071 +10.13 +0.2%  
YTD
 +2.5%  
 +8.1%  
 +0.0%  
 +11.0%  
 +6.0%  
  Targets    Overview: 01/13/2023  
  Up arrow34,900 or 33,150 by 02/01/2023
  Up arrow15,100 or 13,500 by 02/01/2023
  Up arrow1,040 or 950 by 02/01/2023
  Up arrow12,400 or 11,000 by 02/15/2023
  Up arrow4,100 or 3,800 by 02/01/2023
As of 01/27/2023
  Indus: 33,978 +28.67 +0.1%  
  Trans: 14,483 +191.14 +1.3%  
  Utils: 968 +1.08 +0.1%  
  Nasdaq: 11,622 +109.30 +0.9%  
  S&P 500: 4,071 +10.13 +0.2%  
YTD
 +2.5%  
 +8.1%  
 +0.0%  
 +11.0%  
 +6.0%  
  Targets    Overview: 01/13/2023  
  Up arrow34,900 or 33,150 by 02/01/2023
  Up arrow15,100 or 13,500 by 02/01/2023
  Up arrow1,040 or 950 by 02/01/2023
  Up arrow12,400 or 11,000 by 02/15/2023
  Up arrow4,100 or 3,800 by 02/01/2023

Bulkowski on Bear Markets

 

Initial release: 1/6/2023.

What is a bear market and how often do they occur in the indices, stocks, exchange traded funds, and mutual funds? This article provides research to answer those questions.

Bear Market: Findings

Here's some of the lessons found while researching this article.

Bear Market: Backstory

A bear market is a swing from high to low of at least 20%, and a bull market is a swing from low to high of at least 20%. That's the most common definition and it applies to market indices, such as the Dow industrials, Nasdaq composite, or Standard & Poor's 500 index. Unfortunately, it's not enough. Why? Because the Dow industrials, for example, dropped more than 20% in one day (the link shows the decline on Monday, October 19, 1987).

Here's a recap.

On October 16, 1987, the Dow industrials closed down 4.6% as measured close to close. That was a drop of just 108 points, but when the close was at 2,355, it still represented a large drop (in today's Dow, it would be a drop of 1,500 points).

As bad as the Friday drop, it was nothing compared to what happened on Black Monday. On that day, the drop dropped from the prior close of 2,246.73 to a low of 1677.55. That's a plunge of 569 points or 25.3%. That's measured from Friday's close to Monday's low. On Monday, the Dow closed higher than it's low for the day, off 22.6% for the day (close to close). In today's numbers, a 22.6% drop is 7,445 points (using the Jan 5, 2023 close of 32,930 in the Dow).

Below is a slideshow of bear market examples. To advance from slide to slide, either touch one of the small circles at the bottom of the container or click a right or left arrow on the chart.


1 / 3
chart pattern

This is the Dow industrials shown on the daily scale. The Covid-19 pandemic took its toll on the markets, as the chart shows. The Dow peaked on February 12, 2020 at about 29,500.

Just over a month later, March 23, the Dow hit a low of 18,200, or a drop of 38%.

Next up: 3D Systems (DDD).
2 / 3
chart pattern

This is a chart of the stock 3D Systems (DDD) on the daily scale. In October 2022, the stock peaked at almost $11. A month later, just after Christmas, it reached a bottom of $7, for a drop of 36%.

For shareholders, it wasn't a good present to receive unless you were looking to capture a tax loss.

Next slide: DJ US Energy Sector (IYE)
3 / 3
chart pattern

This is a bear swing in the exchange traded fund (ETF), DJ US Energy Sector (IYE). Price dropped from $49 to $35 in just over a month, a drop of 29% from high to low.

I don't show a bear market swing in a mutual fund because getting accurate prices on a line chart is excruciating using my tools. However, these three are good examples of what you'd see in mutual funds.

The end.

Top of page

Bear Market: Methodology

Picture of Alaska Air

The problem with the definition of a bear market (as a swing of 20%) is that it can happen in one day.

Here's a chart of Alaska Airlines. The stock peaked at 82.15 and then started a slide. It bottomed at 58.92 for a trend decline of 28%. In 5 trading days, the stock changed from bullish to bearish. Does that constitute a bear market in the stock? In one day (the day after the spike drop to 58.92, the stock had climbed more than 20%, suggesting the bear market was over.

In some cases, we see a tall price spike happen in one day. Indeed, the decline from high (75.80) to low (58.92) is a drop of 22%. Does that day qualify as a flash bear market in the stock?

If the answer is "no," then how long do you have to wait for a bear market to be valid?

Top of page

Picture of Dow industrials

Here's an example of a retrace in a down trend. I show the Dow industrials from 1931. The index peaked at 196.96 before dropping to a bear market low of 119.89, for a decline of 39%.

That drop qualified it for bear market status. After that, the index climbed to 156.74, or 24% above the low of 119.89. By traditional measures, the bear market ended and the index was back into bull market territory (because it climbed, low to high, more than 20%).

Look what happened next. The index started sliding again, dropping about in half to point A (lower right of the chart). Was that another bear market or was it a continuation of the first one?

I consider this bull market rise (of 24%) as just a retrace in a downtrend. Because it was so short (less than a month long), I decided it didn't qualify as a bull market. So I made a rule (for this research) that the length of the decline had to be more than 30 days. Let's call it a month. Any uptrend or downtrend less than a month was just a retrace and not a flip from bull to bear or bear to bull.

In other research, such as when I am looking for the ultimate high or ultimate low, I use the high to close or low to close measure. That helps eliminate one-day flash crashes.

For this research, here's what I did.

Top of page

Bear Market: Results

Table 1: How Often do Drops of 30% or More Occur?
Index  Data Span (Years)    20% Bear Markets    30% Drops  
Dow industrials93 (from 1929)2714 or once every 6.6 years
Nasdaq composite50 (from 1972)1611 or once every 4.5 years
S&P 500 index72 (from 1950)166 or once every 12 years
469 Stocks12,646 (Varies)N/A6,255 or once every 2 years (avg) or 2.3 years (median)
103 ETFs1,892 (Varies)N/A596 or once every 3.2 years (avg) or 2.8 years (median)
44 Mutual funds927 (Varies)N/A122 or once every 7.6 years (avg) or 7.4 years (median)

Table 1 shows the results when searching for serious bear markets, those having declines of at least 30% (measured high to low).

I started with the Dow industrials (not an exchange trade fund tracking the Dow) and found data going back to late 1928. I computed the trend and began with an uptrend starting in January 2, 1929. In five years (from 1929 to 1933), the index declined five times more than 30% with the worst being a 65% drop in 1932. If you exclude those five congested bear markets, then we have a bear market happening an average of once a decade. Include those five and we see a bear market every 6.6 years. Altogether, I found 27 bear markets (using a 20% high to low measure, not 30%).

The Nasdaq (with data starting in January 1972), had 16 bear markets with 11 of them showing 30% declines or worse. That's a serious bear market once every 4.5 years. In other words, the Nasdaq is more risky that the Dow industrials.

The S&P 500 index started with data from 1950 and I found 16 bear markets, with 6 of them dropping 30% or more. That's once every 12 years, the least risky of the three indices I looked at.

I changed my program to scan stocks, ETFs, and mutual funds in bulk. The table shows the results.

I used 469 stocks which are ones I use daily. The FAQ describes how I chose those stocks. Those 469 stocks had 6,255 drops of 30% or more in 12,646 years of daily price data. That averages to a serious decline once ever 2 years or a median of 2.3 years. In other words, single stocks pose a significant risk of a big decline every other year.

Next I used 103 exchange traded funds (ETFs) in 1,892 years worth of data and found 596 serious declines. That's an average of once every 3.2 years or a median of 2.8 years.

Lastly, I tested 44 mutual funds. I used 927 years worth of data, found 122 declines of 30% or more, and that averages to once every 7.6 years or a median of every 7.4 years

Top of page

-- Thomas Bulkowski

See Also

 

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