The Wall Street Journal and other media outlets often use +/- 20% thresholds to label traditional uptrends and downtrends, stating a new bear market has begun when an index or other security rises or falls 20% off its peak or trough. This heuristic approach can produce great controversy at times because a financial instrument that sells off from $20 to $1 in a bear market will enter a media-sanctioned bull market when it proceeds to gain just 20 cents off of its low, lifting the instrument to 1.20 -- marking a 20% rally!
- Bull markets are typically designated by media outlets as a rise of 20% or more from a near-term low.
- Likewise, bear markets are called when an asset falls by 20% from its high.
- However, these heuristics don't always make sense in practical terms. Calling a bull or bear market often requires a greater degree of judgment.
Defining Bull and Bear Markets
In the simplest definition, rising price signifies a bull market while falling price signifies a bear market. With this in mind, you might think it would be easy to determine what type of market we're grinding through at any point in time. However, it's not as easy as it looks because bull-bear observations depend on the time frames being examined. For example, an investor looking at a 5-year price chart will form a different opinion about the market than a trader looking at a 1-month price chart.
Let's say the stock market has been rising for the last two years, allowing an investor to argue that it's engaged in a bull market. However, the market has also been pulling back for the last three months. Another investor could now argue that it's topped out and entered a new bear market. In sum, the first argument arises from looking at two years of data while the second arises from looking at three months of data. In truth, both points of view may be correct, depending on the viewer's particular interests and objectives
Quantitative methods to detect bull/bear markets rely on technical analysis concepts. Investopedia's Technical Analysis Course will show you how to identify technical patterns and indicators and apply them to make money in bull and bear markets.
In reality, markets form trends in all time frames, from 1-minute to monthly and yearly views. As a result, bull and bear market definitions are relative rather than absolute, mostly dependent on the holding period for an investment or position intended to take advantage of the trend. In this scheme, day traders attempt to profit from bull markets that may last less than an hour while investors apply a more traditional approach, holding positions through bull markets that can last a decade or more.
The longest bull market in modern history - from the bottom of the 2008-09 financial crisis through the first half of 2019 (so far).
The Bottom Line
there's no perfect way to label a bull or bear market and it's easier to focus on specific time frames or by considering the sequence of peaks and valleys on the price chart. Charles Dow applied this method with his classic Dow Theory, stating that higher highs and higher lows describe an uptrend (bull market) while lower highs and lower lows describe a downtrend (bear market). He took this examination one step further, advising that bull and bear markets aren't "confirmed" until major benchmarks, the Dow Industrial and Railroad Averages in his era, make new highs or new lows in tandem.