A:

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 falls 20% off its peak. Conversely, they announce the start of a new bull market when an index or other security rises 20% off its low. This logical 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 a bounce gains 20-cents, lifting the instrument to 1.20 while marking a 20% rally off the low.

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.

[There are many ways to measure bull and bear markets but quantitative methods rely on technical analysis concepts. Investopedia's Technical Analysis Course will show you how to identify technical patterns, trends, signals, and indicators that determine price behavior and how to apply them to make money in bull and bear markets.]

Let's say the stock market has been rising for the last two years, allowing an investor to argue that its 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

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. 

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.

RELATED FAQS
  1. How do you use put options to profit from a bear market?

    Learn how traders use put options in their trading strategies to remain profitable, even in a bear market. Everyday investors ... Read Answer >>
  2. What are the safest investments during a bear market?

    Learn what investments carry the least amount of risk during a bear market and how they can be used to hedge against falling ... Read Answer >>
  3. How does a bull market affect the economy?

    Find out why it can be difficult to prove any real causal link between rising stock market prices and a healthy, growing ... Read Answer >>
Related Articles
  1. Investing

    How to adjust a portfolio in a bear or bull market

    Investors shouldn't panic at the market's daily moves, but small adjustments in the face of a bull or bear market could be a prudent move.
  2. Trading

    Profiting in bear and bull markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  3. Trading

    The Elder-Ray Indicator: Seeing Into the Market

    Elder-ray helps determine the strength of competing groups of bulls and bears.
  4. Investing

    The Wall Street Animal Farm: Getting To Know The Lingo

    Finance professionals speak a different language, but the terms they use are more familiar than you think.
  5. Managing Wealth

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
  6. Investing

    Why Timing the Stock Market Is a Bad Idea

    When a market top looks inevitable how should investors proceed?
  7. Trading

    Which Direction Is The Market Heading?

    The easy and underused NYSE Bullish Percent Index provides insight into market conditions.
  8. Insights

    Are We Approaching a Bear Market?

    The U.S. has seen several deep bear markets since the start of the 20th century, but sentiment anticipating a new downturn may be premature.
  9. Investing

    The Bear Market Isn't Here Yet

    Bear Concerns: Despite the pullback, we are nowhere near a bear market, Bank of America says
RELATED TERMS
  1. Bull

    A bull is an investor who invests in a security expecting that ...
  2. Bear Position

    Bear position is a term representing a short position applied ...
  3. Bear Fund

    A bear fund is a mutual fund designed to provide higher returns ...
  4. Bloodletting

    Bloodletting is a time period marked by severe investing losses. ...
  5. Bull Trap

    A bull trap is a false signal indicating a declining trend in ...
  6. Bear

    An bear is an investor who believes that a particular security ...
Trading Center