Ticker&TapeBull and bear markets
The market does not rise in a straight line. It moves in cycles of advances and declines, and knowing where you are in that cycle is one of the most important things a trader can learn.
Bulls, bears and cycles
A bull market is a long period when stock prices are generally rising. A bear market is a period when they are generally falling. The names come from how each animal attacks: a bull thrusts its horns up, a bear swipes its paws down.
Markets move in cycles. A bull market builds as the economy and company profits grow and investors gain confidence. Eventually prices get ahead of reality, or something changes, such as rising interest rates or a recession, and a decline begins. After the decline, prices find a bottom and a new bull market starts. The cycle repeats, though never in exactly the same way or on a fixed schedule.
Corrections and bear markets
Traders use two common thresholds, measured from the most recent high of an index such as the S&P 500:
- Pullback: a drop of less than 10%. These happen several times in a normal year.
- Correction: a drop of 10% to 20%. Historically, corrections have come along roughly once every year or two on average.
- Bear market: a drop of 20% or more. These are less frequent, but they do the most damage.
What history shows
A few examples, in general terms. After the late-1990s technology boom, the Nasdaq lost close to 80% of its value between 2000 and 2002, and it took many years to recover. During the 2007 to 2009 financial crisis, the S&P 500 fell by more than half over about a year and a half. In early 2020, fear about the pandemic pushed the S&P 500 down about a third in roughly one month, one of the fastest declines ever, yet it recovered its high within months. In 2022, rising interest rates drove a bear market that lasted most of the year, with growth stocks hit especially hard.
Very roughly, bear markets have lasted around a year on average, while bull markets have lasted several years. Over the long run the market has risen far more than it has fallen, but each individual decline can feel endless while you are in it, and there is no rule that says the next one will be short.
Why most stocks follow the market
When the general market falls, it drags most stocks down with it, good and bad. Roughly three out of four stocks move in the same direction as the major indexes. In a bear market, even companies with excellent earnings often drop 30% to 50%, because funds sell what they can and fear spreads to everything.
Growth stocks usually swing harder than the market in both directions. If the S&P 500 falls 20%, a fast-moving growth stock might fall 40% or more. That is why traders in this school check the direction of the market before buying anything. You will learn how in market direction, and you can follow how many stocks are participating on the Breadth page.
What this means for a beginner
First, expect declines. A 10% correction is normal, not a disaster, and you will see many of them. Second, do not fight the market: buying aggressively while the indexes are falling is the most common way beginners lose money. Third, bear markets end, and the strongest stocks of the next bull market often start moving early, near the bottom.
In practice, a trader with a $10,000 account might invest most of it when the market is in a confirmed uptrend, reduce to a smaller amount during a correction, and hold mostly cash in a bear market. Cash is a position too. You will learn how to adjust this in exposure.
Market declines at a glance
| Pullback | Less than 10% from the high |
|---|---|
| Correction | 10% to 20% from the high |
| Bear market | 20% or more from the high |
| Typical length | Bear markets are usually months to a couple of years; bull markets usually last several years |
Common mistakes
- Panicking at every 10% correction and selling good positions at the worst moment.
- Buying more and more stocks during a bear market because prices look like a bargain.
- Assuming a bear market will be over quickly, or that it will never end.
Key points
- Bull markets rise for years; bear markets fall 20% or more, usually over months.
- A correction is a 10% to 20% drop and is a normal part of investing.
- Most stocks follow the general market, and growth stocks fall harder than average.
- Check market direction before buying, and hold more cash when the market is weak.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. The S&P 500 falls from 5,000 to 4,400. What do traders call this decline?
A drop of 600 points from 5,000 is 12%, which falls between 10% and 20%: a correction.
2. During a bear market, what usually happens to companies with excellent earnings?
Most stocks follow the general market. Even strong companies often drop 30% or more in a bear market.
3. What is a sensible approach for a beginner when the market enters a bear market?
Fighting a falling market is a common way to lose money. Holding cash protects the account until a new uptrend begins.
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