What is a Bear Tack

A bear tack is a shift toward a bearish market sentiment or a drop in the value of a stock, sector or market that may signal the start of a downtrend.

Breaking Down Bear Tack

A bear tack is of interest to investors and analysts it may precede a significant price correction. If the asset or market goes on to drop by 20 percent, it officially enters a bear market. While investors associate a bear tack with an imminent downturn, the term does not necessarily imply that the speaker believes that a major correction is coming. In that way, the phrase bear tack can describe a market phenomenon without making a specific claim as to its significance.

Tacking is a term from sailing that refers to a maneuver in which a boat zigzags in the water to reach an upwind destination. The phrase bear tack refers to an analogous shift in the direction of a financial trend, one which investors may need to react to, just as a sailor adjusts to changing conditions.

When a Bear Tack Signals a Trend Reversal

The longer the bullish period that precedes the bear tack, the more likely the bear tack signals a meaningful shift in investor sentiment, spurring a trend reversal. A trend reversal is even more likely if the fundamentals of a stock, sector or market are already deteriorating.  

For example, a bear tack in two major market indicators preceded the Great Recession. The S&P 500 and the Dow Jones Industrial Average both dropped by 5 percent after a sustained period of growth culminating in record highs in late 2007. The two bear tacks suggested a larger market correction was imminent because of the context in which they appeared.

What a Bear Tack Means for the Passive Investor

Responding to a bear tack is only an issue for investors employing active investing strategies, using complicated analysis and frequent trades to beat the market. Passive investors prefer to earn market returns and move their money as infrequently as possible. Most of the time, a passive investor would not react to a bear tack by selling off a position or initiating a hedge because that investor has decided to ride out market downturns.

When passive investors panic and sell off their positions in a down market, they risk undermining their passive strategy by selling low instead of holding on until the market recovers. Before evaluating market signals, including bear tacks, investors should understand their overall investing strategy because that determines if and how one should react to changing market conditions.