InvestorQ : Are there any typical signs of a bear market?
Aditi Sharma made post

Are there any typical signs of a bear market?

3 years ago

That is hard to define since bear market is as much a matter of perception as it is of asset allocation and the realignment of portfolios. Moving from equity to debt is logical asset allocation, isn’t it? Here are some cues to identify a bear market so that you know when you are in the midst of one.

Firstly, you must look for a 3-step process. The best way to identify a bear market is to carve out the 3 phases. The sharp crash is followed by a sharp bounce back. Then volatility dies down and the market gradually grinds down. This is the classic bear market.

Secondly, the two really reliable indicators of a bear market are liquidity and leadership. A bear market is created if the liquidity driving the bubble suddenly dries up. Watch out for rate hikes and controls. Also check if the leaders who caused the bull market are seeing consistent value destruction. This is unmistakable!

Thirdly, keep an eye on negative breadth of market indicators. It is a classic give away. Negative breadth is created when the declining stocks consistently outnumber the rising stocks. This trend is visible in large caps and mid caps. Coupled with illiquidity and loss of leadership, breadth defines the perfect bear market. In the past we have seen that bear markets commenced when the leaders that led the rally actually succumbing. For example, cement in 1992, technology in 2000 and real estate in 2008 are all classic instances of loss of leadership as the sure shot signal of weakening bull market rallies. If you buy stocks wisely in a bear market, then at some point in the future you will be happy. But, you need to act”.