Bear Market Characteristics

Bear Market Duration And Depth

The average and median bear market lasts around a year and a half. Certain bear markets have been very brief, for example, the recession of 1990-91 only led to a short, shallow, stock market decline. Meanwhile, the 2000-03 and 2007-09 bear markets led to a 50% decline that lasted between a year and a half and two years.

The average decline in bear markets is around 42%. Some declines have been shallower, but the past two bear markets led to 50% declines. Historically, the bigger the bull markets come, the bigger they fall.

Bear Market Rallies

Bear markets are extremely difficult to trade for bulls and bears alike. In bear markets, the primary trend is down, and any rallies are counter-trend moves that should be used to hedge or sell the rallies. One of the least known characteristics of bear markets is the strength and frequency of counter trend rallies.

In theory, it should be easy to be long in bull markets and make money and be short in bear markets and make money. However, reality is more complex. Bear market downward slides in prices are often too painful for many investors to bear, and they become forced sellers the further the market falls. The situation is not an easy one for bears. Typically, bears will increase their short exposure as markets fall, but they must contend with very painful rallies.

In a typical bear market, the counter-trend rallies in the first few months are between 8-12%. These rallies typically cause pain for short sellers and force shorts to cover. However, markets roll over and continue falling. Later in the bear markets, countertrend rallies become very violent, with 20% rallies near the bottom. These rallies still pale in size relative to the prior decline because they only tend to retrace half of the previous decline. The market then goes on to make another lower high and lower low in line with the primary downward trend.

For most investors, these declines and rallies are extremely painful and cause investors to lose money on the short and long side. The most recent market top was Dec 2021, which means if this bear market follows the historical pattern there is a decent chance of continued volatility ahead.