The market stabilizes and miraculously the bounces continue to hold their gains. After so many bottom attempts, tired bulls aren’t convinced or ready to jump in. This stage occurs after a new low is made and the rebound actually holds its ground. Heavy volume selling reaches a fever pitch as a near-term bottom is put in. Good news results in selling as bad news is catastrophic for stocks. Margin calls and forced liquidations cause large gaps down. Buyers go on strike and risk-off positions are taken across the board after a number of attempts to bounce have failed ushering in new lows. Bear market headlines hit the evening news warning of the impending recession causing workers to review their retirement portfolios as fund outflows increase. As stocks continue to fall, panic tends to take over as the magnitude of the selling increases causing investors to worry. Market drops make lower lows while bounces make lower highs, the definition of a downtrend. This begins the downtrend that ultimately materializes into a sell the bounce strategy. Eventually, the robust buying starts to thin out since each bounce rises to a lower high. FOMO kicks in on the initial drops to power a sharp bounce only to sell-off again. The buy the dip strategy that has been working for years suddenly starts wane as each bounce on a dip gets lower. The first stage tends to occur gradually after making all-time highs and speeds up and transparency materializes. We reviewed what to expect in a recession, now let’s see what to expect on the stock market side and what to expect during the three stages of a bear market. The reason why bear markets last less than recessions is that markets tend to react first due to its forward looking nature while recessions are identified and labelled on lagging government GDP reports. Bear markets tend to foreshadow a recession. Bear markets last an average of just over a year while recessions last an average of 17 months, with the longest bear market lasting 630 days from 1973 to 1974. The dreaded bear market is technically defined as a period of (-20%) or more declines from its highs lasting at least 60 days.
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