Comprehensive Analysis of Bear Market Characteristics: From Market Signals to Response Strategies

Throughout the long history of capital markets, stock prices fluctuate in cyclical tides. Investors often look forward to the gains of a bull market but tend to panic during a bear market. However, a deeper understanding of bear market characteristics can actually help investors seize opportunities during market downturns.

Core Definition of Bear Market Characteristics

A bear market (Bear Market) is defined as: when the price of the underlying asset drops more than 20% from its recent high, signaling the onset of a bear phase. This definition applies not only to stocks but also to bonds, real estate, precious metals, commodities, exchange rates, and all categories of cryptocurrencies.

It is important to note that a bear market is fundamentally different from a “market correction.” A correction refers to a short-term decline of 10%–20%, usually a temporary adjustment; whereas a bear market is a long-term, systemic downturn that can last months or even years, with far-reaching impacts on asset allocation and psychological expectations.

Additionally, bear markets are not the same as economic recessions (measured by a negative year-over-year Consumer Price Index CPI growth rate). While they may occur simultaneously, they reflect different levels of economic issues.

Five Major Signals of Market Performance in a Bear Market

1. Deep Price Declines and Adjustments

When most stock indices decline 20% or more over at least two months, the market enters a technical bear phase. The U.S. Securities and Exchange Commission (SEC) has a clear definition of this. According to statistics, during 19 bear markets in the past 140 years of the S&P 500, the average decline was 37.3%, with the most recent five bear markets averaging a 38% drop. These figures reflect the depth of asset depreciation during bear markets.

2. Time Cycle Characteristics of Bear Markets

The duration of a bear market varies depending on the severity of the crisis. Historical data on the S&P 500 shows an average bear market lasting 289 days (about 9.6 months). However, there are exceptions: the bear market triggered by the COVID-19 pandemic in 2020 lasted only one month, setting the record for the shortest. In contrast, the bear market during the 1973–1974 oil crisis lasted 21 months, making it one of the longest modern corrections in U.S. stock history.

3. Deterioration of Economic Fundamentals — The Deep Root of Bear Market Characteristics

Bear markets are often accompanied by macroeconomic deterioration such as recession, rising unemployment, and accelerating inflation. When economic prospects worsen, consumers cut back on non-essential spending, companies reduce hiring and investment, and capital markets anticipate declining corporate profits. The convergence of these factors can cause stock prices to plummet in the short term.

4. Asset Bubbles and Their Bursting

Bear markets often originate from prior over-speculation in asset prices. When market sentiment is highly speculative and prices deviate significantly from intrinsic values, a signal of profit-taking can trigger a stampede effect. Price volatility in commodities tends to be more intense than in the underlying assets themselves, which is why asset bubbles are often the catalysts for systemic bear markets.

5. Changes in Market Sentiment and Policy Environment

Central bank policy shifts (such as interest rate hikes and balance sheet reductions) directly reduce liquidity, suppress corporate and consumer spending, and push stock prices lower. Simultaneously, loss of market confidence can create a self-reinforcing negative cycle—investors sell assets and withdraw funds, further accelerating declines.

Four Major Triggers Behind Bear Market Characteristics

Market Confidence Collapse: When pessimism about future economic prospects prevails, consumption, investment, and financing all contract simultaneously, sharply increasing selling pressure.

Bursting of Price Bubbles: High-tech and emerging industries are prone to bubbles. When valuations lose support, the market quickly shifts downward.

Major Risk Events: Financial crises, sovereign debt crises, geopolitical conflicts, natural disasters, or pandemics can trigger market panic. Examples include the 2022 Russia-Ukraine war driving up energy costs and the COVID-19 pandemic in 2020 causing global economic stagnation.

Tightening Monetary Policy: Rate hikes and quantitative tightening by central banks like the Federal Reserve rapidly drain market liquidity.

A Review of Six Recent U.S. Stock Market Bear Markets

2022 Bear Market: Driven by inflation post-QE, intensified Russia-Ukraine conflict, China’s pandemic lockdowns disrupting global supply chains, and aggressive rate hikes and balance sheet reductions by the Fed, leading to a tech stock decline.

2020 COVID Shock: The shortest bear market, from the peak of 29,568 on the Dow on February 12 to 18,213 on March 23 (a 38% decline). A 20% rebound by March 26 exited the bear phase. Rapid QE measures by countries followed, leading to a two-year super bull market.

2008 Subprime Crisis: Began in October 2007, with the Dow dropping from 14,164.43 to 6,544.44 on March 6, 2009, a 53.4% decline. Low interest rates fueled a housing bubble, and banks securitized and sold risky assets, culminating in a systemic financial collapse. It took until March 2013 to recover to the 2007 high.

2000 Dot-com Bubble: High-tech companies with no real profits were wildly overhyped, leading to severe valuation distortions. When capital withdrew, a stampede ensued, triggering the 2001 recession and the 9/11 attacks, which worsened the stock decline.

1987 Black Monday: On October 19, the Dow plunged 22.62%. Automated program trading amplified the decline, but swift government measures (interest rate cuts, circuit breakers) stabilized the market. Recovery took 1 year and 4 months, much faster than the 1929 Great Depression.

1973–1974 Stagflation Crisis: OPEC oil embargo caused oil prices to soar from $3 to $12 (a 300% increase), coupled with the Watergate scandal eroding confidence. The S&P 500 fell 48% over 21 months, marking one of the longest and deepest systemic crashes in recent history.

Investment Strategies During Bear Markets

Strategy 1: Actively Reduce Risk Exposure

Maintain sufficient cash reserves, avoid excessive leverage. Reduce holdings in high P/E and overhyped growth stocks, as these tend to fall the deepest during bear markets.

Strategy 2: Select Defensive Assets and Undervalued Quality Stocks

Defensive sectors like healthcare and consumer staples tend to outperform during downturns. Focus on undervalued companies with strong moats—compare current P/E ratios to historical ranges, and start deploying capital in stages at low points. These companies should have sustainable competitive advantages capable of supporting at least 3 years of recovery; otherwise, they may not return to previous highs.

If individual stock selection is uncertain, investing in broad market ETFs is also viable, waiting for the next economic recovery cycle.

Strategy 3: Use Derivatives to Capture Short Selling Opportunities

Bear markets have high probability of declines, increasing the success rate of short selling. CFDs (Contracts for Difference) are suitable derivatives that allow traders to short indices, forex, futures, stocks, and metals without owning the underlying assets. Many platforms offer demo accounts, enabling investors to practice with virtual funds and reduce real trading risks.

How to Identify Bear Market Rebound Traps

Bear Market Rebound (Bear Trap) refers to short-term upward movements lasting days or weeks within a downtrend. An increase of over 5% is typically considered a rebound. Such rebounds can mislead investors into believing a bull market has begun, but unless stock prices rise continuously for months and exceed 20% above the bear market lows, it should still be regarded as a rebound.

Three Indicators to Differentiate Rebounds from Genuine Bull Markets

1. Moving Average Test: 90% of stocks trading above their 10-day moving average
2. Breadth Confirmation: More than 50% of stocks are advancing
3. New Highs: Over 55% of stocks hitting new highs within 20 days

When these conditions are met, the probability of a trend reversal is more credible.

Conclusion

A bear market is not a disaster but an inevitable phase in market cycles. The key for investors is to accurately identify bear market features and adjust strategies promptly. Whether through cash allocation, selecting resilient assets, or employing short-selling tools, one can protect capital and even profit during downturns.

The core is to stay calm, strictly follow stop-loss and take-profit rules, and avoid being misled by short-term rebounds. Ultimately, patience and disciplined action will prepare investors for the next bull run. The most valuable aspect of a bear market is not short-term gains but the opportunity to lay the groundwork for the next upward wave.