The S&P entered “officia” bear market territory on Oct. 4. Why on Oct. 4? For the first time, since early 2009, the bellwether index declined more than 20%. Most of Wall Street considers a 20% decline to be a bear market indicator.
The “astute” financial media agrees. Here are some headlines from October 4:
Reuters: “S&P enters bear market territory”
TheStreet: “S&P falls to the bears”
Wall Street Journal: “Market nears bear territory”
TheStreet: “You haven’t seen anything yet’ as stocks sink, economies falter”
Reuters: “Bernanke says Fed ready to do more to aid economy”
How to Define a Bear Market
The S&P wasn’t ready to deliver on the media’s assessment of a bear market. But is the recent melt up just a “too fast, too far” flash in the pan, or does it have staying power?
There are various ways to define a bear market. Only a few of them are proactive measures, while most of them are inaccurate and lagging definitions.
We don’t think there’s a cookie cutter approach to identifying a bear market. Every market top (and the subsequent bear market) is as unique as a hurricane (or another natural disaster):
You can use various data to predict the outcome to the best of your ability, but you never know for sure until after the fact. No matter how serious and credible the warnings signs are, there will always be people stubborn enough to fight the forces of nature (or the markets).
We use a dual confirmation method to identify a market top and bear market: