Stock Market Labels: Bear or Correction

For some investors in the stock market, it is important to be accurate about describing whatever the market is doing at in particular time.

For example, if the market (as defined by the S&P 500 Index) has been moving steadily up for a sustained period, they want to call it a bull market.

On the other hand, if the market is headed south, no one wants to proclaim a bear is in the living room.

Stock Investors

It is natural for investors to be optimistic and quickly declare a bull market.

However, you can only tag a market by its performance. A bull market would need to post a 20 percent rise in the index.

You can only do that – officially – after it has happened.

A bigger concern to some investors is the emotional danger of declaring a bear market.

People talk about bull and bear markets like either one or the other condition must exist, but that’s not the case.

Stocks can coast along like swells on the ocean rolling up and down, but never establishing a pattern in either direction.

Off by 20 Percent

To officially be a bear market, the S&P 500 Index must be off 20 percent and that has only happened 10 times since 1946, according to a recent article in the New York Times.

More frequently, markets slip into a correction, which is a 10 percent drop.

Many would suggest these corrections are often valuable pressure relieving mechanisms to bleed off over-bought markets that might otherwise come crashing down into a full bear market.

Corrections are also a reminder to those who chose to ignore the market’s risk-reward relationship and believe they can grab high returns without high risks.

We Won’t Know

The problem is sometimes a correction is more than a correction.

Economic, market, and/or political conditions align themselves in such a manner than serious damage is done to the market – damage that will take a long time to repair.

We just won’t officially know it’s a bear market until the S&P 500 Index falls past that 20 percent loss mark.

At that point, it will be an official bear market, but that knowledge will be of little comfort.

Other Stories in This Series

Prepare Stocks for Bear Market

Stock Market Labels: Bear or Correction

Stocks Subject to Market Cycles

Stock Investors Should Avoid the Extremes

Don't Let Stock Market Disrupt Your Plan

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