Bear Tack

What Is a Bear Tack?

Bear tack is a slang term used by stock investors and analysts to describe a negative movement in a stock, sector, or market that may foretell the beginning of a downward trend.

Tacking is a term borrowed from sailing that refers to a maneuver in which a sailboat caught in an upwind changes course repeatedly, zigzagging through the water to reach an upwind destination. The phrase bear tack suggests a similar shift in the direction of a market trend, one which investors may need to react to, just as a sailor adjusts to changing conditions.

A bear tack is seen as most significant when it occurs in a stock or sector that has shown a prolonged upward trend. Some stocks become fads, and when the fad fades the traders disappear fast.

Key Takeaways

  • A bear tack is an early indicator that a steeper decline in the market may be on the way.
  • For active investors, it's time to consider changing course.
  • For buy-and-hold investors, it's just another short-term trend to ignore.

Understanding a Bear Tack

A bear tack is of interest to investors and analysts because it may signal a significant price correction in the near future. It's important to note that it may simply be an aberration, not the first step on a downward slope.

A stock, a segment, or the markets in general officially enter bear market territory after prices decline by 20% or more. 

When a Bear Tack Signals a Trend Reversal

Stock analysts say that the longer a bullish period lasts, the more likely it is that a bear tack does signal a meaningful shift in investor sentiment. This trend reversal is even more likely if the fundamentals of a stock, sector, or market are noticeably deteriorating. 

For example, a bear tack in two major market indicators preceded the Great Recession. In late 2007, the Standard & Poor's 500 Index and the Dow Jones Industrial Average both dropped by 5% after a sustained period of growth culminating in record highs. 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 Active Investor

Active investors are always looking for the next move up or down in prices, ready to take advantage of them with a quick trade.

They are not, typically, choosing stocks that they intend to hold for the long term because they think the company's strategy for growth is likely to succeed over the next few quarters. They are watching market movements from minute to minute, ready to latch onto the next trend in prices up or down.

These are the investors who watch for a bear tack. They may sell some shares to realize a gain before prices fall further, or they may take a short position (a bet that a stock will fall further by a specific date.)

In any case, the stated goal of an active investor is to beat the market averages. Responding to a bear tack is a pressing issue only for investors using active investing strategies who trade frequently in an attempt to beat the market averages.

What a Bear Tack Means for the Passive Investor

A passive investor will almost always ignore a bear tack and all of the other day-to-day noise coming from the stock markets. This type of investor is in it for the long haul.

Passive investors buy and hold investments intending to match the market's movements over time. They may buy stock index mutual funds or exchange-traded funds (ETFs). Or, they may choose individual stocks that they believe will grow over time.

In any case, they're not responding to short-term swings in market prices.

Such investors also are mindful of the tax implications. Stocks must be held for a year for the profits from their sale to count as long-term capital gains rather than short-term capital gains.

Riding Out a Bear Tack

Adopting a passive strategy means riding out ephemeral market downturns with confidence that prices will, in time, recover. 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.

Responding to a bear tack is an issue only for investors using active investing strategies who trade frequently in an attempt to beat the market averages.

A passive investor is unlikely to react to a bear tack by selling off a position or initiating a hedge.

Before evaluating market signals, including bear tacks, investors should understand their overall investing strategy. That strategy will determine if and how an investor should react to changing market conditions.

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