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Bear markets are not something that people enjoy talking about and infact of most people avoid using this term as far as possible. A correction in the long-term bull market is acceptable but an out and out prognosis of a bear market, there won’t be too many takers for that.

Bear markets are periods when prices keep falling down over a long period of time and the general consensus in the market is that they will continue to their downward movement for the foreseeable future.

Typically bear markets are associated with economic contractions, high unemployment and high inflation

How does one differentiate between a bull market correction and a bear market correction?

There is no simple answer to this. Some people are comfortable with a 20% number. A market fall of more than 20% over a sustained period of time is when the bear market lingo starts to creep in. these markets are also characterized by long periods of sideways movement.

Calling a bear market is always difficult but yet everybody wants to do that. Peter Lynch made an interesting comment about at every talk he gave he had people asking him whether markets were good or bad and he said that the only co-relation he had figured is that every time he got promoted the markets went down. The next question to him would have been –

Every time I buy a stock, the market goes down?

Lynch had a very interesting statistic to quote,”The price of an average stock fluctuates 50% in a year, so if you buy a Rs 100 then it could go up to Rs 150/- or it could go down to Rs 50 in the next year or so, say this price starts to move up from Rs 100 to about Rs 120 and you buy some of the stock expecting strong upmove but unfortunately the stock decides to move down before it goes up and it goes down to Rs 75 and the investor sells out in panic. Then you become a sucker and more so if the stock then decides to go up to Rs 150- this is a classic argument against timing the market.

They say that the classic contrarian is the one who doesn’t do necessarily do the opposite of what everyone else is doing in the market, he is the one who will wait for things to cool down and then go out and buy stocks that nobody else cares about. That is one way to play out bear markets. Keep your cool and start accumulating value scripts.

Bear markets can see 50% declines from their top. Looking back at history from April 1992-93 or if you look at September 1994, down to 1996, and the more recently of Feb 2000 to September 2001, all these period saw decline of upto 50% or so and these periods lasted between 1-2 years and within those periods there were many rallies showing as much as 30-60% of upswings which did not materialize into bull markets.

Bear markets so P/E contractions as well. In 2000 the forward multiples went from 20 down to 10 and while in 1994-1996 period they went from 17 to around 10. One thing is for sure, “sharper the preceding rise, the bigger the fall”.

Technically US markets are not yet down 20% from their highs of last October of about 14,000 odd levels. Coming back to our markets, we still have a robust GDP growth rate at the moment. We have to watch out for inflation and interest rate to see where we are headed.

So what are the classic indicators of a bear market?

“The standard measure as per the developed markets is that if there is an erosion of more than 20% from the highs that have been reached during the bullish phase then it would normally be treated as a kind of bear market scenario but experience with our markets have shown that we are prone to showing declines greater than 30% during normal reactions also. So as a benchmark, we could use something like 30% pullback from the top of being a definition or an indicator of us slipping into a potential bear phase and we do have that as of now.” says CK Narayan – ICICI Secruties.

Technically then it fits into the definition of bear markets for India at the moment?

You are right on the fringes of it because we have a pull back on the Nifty and Sensex an exact amount of 30% but if you were to make that list broader and look at it more in terms of stocks particularly the leading ones and perhaps the midcap ones, one will find a considerable number which are much more than 30%. So from such a context one would say that the odds are quite heavily leading towards us having slipped out of bull phase and leaning into what me may call as a bear phase.

Source: Moneycontrol.com