Viewing investment opportunities from a bear market perspective: How to turn crisis into opportunity during a downturn

In the eternal cycle of the capital markets, no one can escape the test of a bear market. But true investors do not avoid bear markets; instead, they understand what a bear market means, grasp its规律, and look for opportunities when others are panicking.

What is a bear market? Understand its true meaning in one minute

A bear market (Bear Market) is simply defined: when asset prices fall more than 20% from their highs, the market enters a bear market state.

This is not just a stock phenomenon. Bear markets can occur in any asset class—stocks, bonds, cryptocurrencies, real estate, commodities—all can experience this systemic price plunge.

Conversely, when asset prices rise more than 20% from their lows, it is called a bull market.

It is important to note that a bear market is not the same as a “market correction.” A correction is a short-term adjustment where stock prices fall 10%–20% from their highs, happening frequently and lasting a short time. A bear market, however, is a longer-term, systemic downturn that has profound psychological and capital allocation impacts on investors.

What are the signs before a bear market arrives?

1. Stock prices decline more than 20% as a sign of entering a bear market

The U.S. Securities and Exchange Commission’s definition is clear: when most major indices decline 20% or more over at least two months, the market officially enters a bear market.

2. The average bear market cycle lasts 367 days, but can be as short as 1 month or as long as several years

Looking at the historical data of the S&P 500 index, over the past 140 years, 19 bear markets saw an average decline of 37.3%, with an average duration of about 289 days. There are exceptions—such as the COVID-19 pandemic bear market in 2020, which lasted only 1 month, and full recovery to previous highs took several years.

3. Economic recession and soaring unemployment often accompany bear markets

Bear markets are often associated with economic downturns, high unemployment, and deflation. Central banks usually initiate quantitative easing to rescue the economy at this time, but note that the rise before QE is often just a bear market rebound, not a true exit from the bear market.

4. Asset bubbles accumulate and become the breeding ground for bear markets

Price volatility in commodities often far exceeds their intrinsic value, and most bear markets originate from overinflated bubbles. When the market is flooded with irrational investment enthusiasm and central banks tighten monetary policy to curb inflation, bear markets arrive.

What forces drive the arrival of a bear market?

Market confidence collapse

When future economic prospects look bleak, consumers start hoarding cash and reduce spending, companies face declining revenues and cut back on hiring and investment, and investors begin selling assets. These three forces act together, causing stock prices to plummet in the short term.

The bursting of bubbles and the resulting stampede effect

When asset prices are driven up to the point where no one is willing to buy, they start reversing downward. This triggers a stampede effect, accelerating price declines and causing market confidence to collapse.

Financial risks and geopolitical shocks

Major events like bank failures, sovereign debt crises, wars, and conflicts can trigger market panic. The Russia-Ukraine war pushed energy prices higher, increasing economic uncertainty, while the US-China trade war damaged supply chains and corporate profits.

Changes in monetary policy

Federal Reserve rate hikes and balance sheet reductions directly decrease liquidity, suppress corporate and consumer spending, and put downward pressure on the stock market.

Sudden external shocks

Natural disasters, pandemics, or energy crises can lead to global market crashes. The COVID-19 pandemic triggered worldwide panic in 2020.

Six lessons from historical bear markets in the US stock market

2022: A triple blow of rate hikes + war + pandemic lockdowns

Post-pandemic, central banks engaged in aggressive QE, causing inflation to soar. The Russia-Ukraine war pushed up food and oil prices. The Fed sharply raised interest rates and shrank its balance sheet to curb inflation, leading to sharp declines in tech stocks and other previously high-flying assets.

2020: The shortest bear market ever

The COVID-19 pandemic caused the Dow Jones to fall from 29,568 on February 12 to 18,213 on March 23 (a 38% drop). However, global central banks learned lessons from 2008 and quickly implemented QE. By March 26, the index rebounded 20%, exiting the bear market, and then entered a super bull market lasting two years.

2008: Systemic collapse of the financial crisis

From October 2007, the Dow Jones rose from a high of 14,164, then fell to 6,544 by March 2009 (a 53.4% decline). The subprime mortgage crisis was triggered by low interest rates stimulating the housing market, with banks packaging high-risk loans into financial products and selling them repeatedly. Overheated housing prices and rising interest rates caused a chain reaction of collapses. It took nearly six years for the Dow to recover to its 2007 high, until 2013.

2000: The dot-com bubble burst

In the 1990s, many high-tech companies went public, mostly concept stocks without real profits, leading to severe valuation bubbles. When the tide turned, a stampede ensued, ending the longest bull market in US history and triggering the 2001 recession. The 9/11 attacks further worsened the stock market crash.

1987 Black Monday: The horror of algorithmic trading

On October 19, the Dow plunged 22.62%. The Fed raised interest rates amid tense Middle East tensions, and automated trading with stop-loss mechanisms caused cascading sell-offs. The government responded by cutting interest rates and introducing circuit breakers. The market recovered within 1 year and 4 months, much better than the 10-year depression of 1929.

1973-1974: Oil crisis and stagflation

The Middle East war led OPEC to embargo oil exports to Western countries, causing oil prices to soar from $3 to $12 per barrel (a 300% increase), exacerbating US inflation at 8%. Subsequently, stagflation appeared—GDP shrank 4.7% in 1974 while inflation reached 12.3%. The S&P 500 fell 48%, the Dow halved, and the bear market lasted 21 months with extremely slow economic recovery.

Three major investment strategies during a bear market

Strategy 1: Defense is better than offense

Keep sufficient cash to handle volatility, reduce leverage. Stay away from assets with high P/E ratios and inflated valuations, as these tend to surge in bull markets but fall sharply in bear markets.

Strategy 2: Find safe-haven assets and undervalued quality stocks

In addition to holding cash, consider sectors like healthcare that are resilient during downturns. For undervalued stocks, use historical P/E ranges to buy in stages at lower levels. The key is that these stocks must have a durable moat and competitive advantage that can last at least 3 years; otherwise, they may not recover to previous highs when the market rebounds.

For investors unable to assess individual stock competitiveness, broad market ETFs are a safer choice.

Strategy 3: Use short-selling tools to find contrarian opportunities

Bear markets have a high probability of decline, and short-selling success rates increase accordingly. CFDs (Contracts for Difference) are emerging derivatives that allow trading based on price differences, covering global indices, forex, futures, stocks, metals, and all volatile assets without involving physical commodities. Many platforms offer demo accounts for practice, so traders can prepare thoroughly before a real bear market arrives.

Beware of bear market rebounds and traps

Bear market rebounds (also called bear traps) refer to short-term upward movements during a bear market trend, usually recognized when the rise exceeds 5%.

Many investors mistake these for the start of a bull market, but unless stock prices continue rising for days or months, or break above 20% to officially exit the bear market, it is just a rebound.

How to tell if a rebound is genuine or a turning point?

Pay attention to these technical indicators:

1. 90% of stocks trading above their 10-day moving average
2. More than 50% of stocks advancing
3. Over 55% of stocks hitting new highs within 20 days

When these indicators appear simultaneously, it suggests the market may truly be entering an upward trend.

Final reminder

A bear market is not the end of the world. The key is to identify the start of a bear market early and use appropriate financial tools to find investment opportunities. Protecting assets while being both long and short can lead to profits.

For prudent investors, the greatest test during a bear market is patience and discipline—strictly executing stop-loss and take-profit orders—to preserve capital for the next bull market. Remember: markets are always cyclical; after a bear, there is always a bull.