A bear market is typically used to describe a downward market. It specifically implies to a market that has fallen by 20% or more from a previous high, lasting for a long period of time, typically two or more months. Kavan Choksi / カヴァン・ チョクシ says that this occurs when the number of sellers outweighs the number of buyers, ultimately resulting in pessimistic market sentiment. Modern traders may trade a bear market by making use of popular derivative tools like spread bets and contracts for difference (CFDs). Such a market may come with a number of risks. Hence, traders must try to create an efficient bear market trading strategy in order to lower the risk of losses as much as possible.
Kavan Choksi / カヴァン・ チョクシunderlines the key types of a bear market
The financial markets are prone to growing and contracting naturally with the changes in supply and demand. This constant change is often caused by certain fundamental economic factors that tend to impact the natural buy and sell cycle of an economy, thereby giving rise to bull and bear markets. A full-on bear market must not be confused with shorter-term corrections of a bull market. It is very difficult to accurately predict when a bear market will occur, or how long it will last for. In a similar manner, it can be complex to predict the end of a bear market as well.
Bear markets can be of varying types, each of them having a distinctive length, impact and recovery time. Distinguished bear markets essentially produce different kinds of recessions, and some of them cause more damage to the economy of a country in the long term. Here are the major types of bear markets:
- Structural bear market: A structural bear market is often linked with stock market bubbles and imbalances within the economy. The 2007-2009 Global Financial Crisis can be a good example of a structural bear market. Such a bear market tends to be often linked with banking crises, where debt loans are over extended to individuals. A structural bear market tends to last the longest, and tends to have an average length of 3.3 years and recovery time of 9.2 years.
- Cyclical bear market: A cyclical bear market generally happens at the end of a business cycle, where there appear to be rising interest rates and high inflation rates, in addition to declining overall profits. This invariably results in a damaging outlook for future potential and economic growth. A cyclical bear market is a somewhat medium-term bear market that declines less than structural bear markets and lasts for around 25 months on average.
- Event-driven bear markets: This type of bear market tends to be triggered by global events that have an impact on the economy, like pandemics, wars and even terrorist attacks. The COVID-19 pandemic and 9/11 terrorist attack can be considered to be examples of such bear markets. Event-driven bear markets tend to decline the least and recover so the fastest. It is the shortest form of a bear market.
Kavan Choksi / カヴァン・ チョクシ mentions that one of the prime characteristics of a bear market is that it is usually influenced by widespread investor fear over the future outlook of an economy. This fear may lead to panic selling, thereby causing large drops and spikes in price movement.