Identify bear market characteristics and master the key to successful contrarian investing

Throughout the long history of the capital markets, bull and bear markets occur cyclically like tides. Many investors are eager for the prosperity of a bull market but panic when a bear market arrives. In fact, true investment experts are those who temper their minds and discover opportunities during bear markets.

What Exactly Is a Bear Market

A bear market (Bear Market) refers to a prolonged decline in asset prices of over 20% from recent highs, and this downturn can last for months or even years. For example, in 2022, the Dow Jones Industrial Average dropped from a high of 36,952.65 in January to 29,260.81 at the end of September, officially entering a bear market.

The opposite is a bull market (Bull Market), where prices rise more than 20% from lows. It’s important to note that the concepts of bull and bear markets are not limited to stocks; they apply to all assets including bonds, real estate, commodities, and cryptocurrencies.

Characteristics of a Bear Market: How to Determine if the Market Has Entered Recession

Key characteristic one: Price decline exceeds 20%

According to the standards of the U.S. Securities and Exchange Commission, when most stock indices decline by 20% or more over at least two months, a bear market is considered to have formed. This is an important boundary distinguishing a bear market from a short-term market correction (10-20% pullback).

Key characteristic two: Duration of the cycle is relatively long

Historical data shows that, over the past 140 years, the S&P 500 experienced 19 bear markets with an average decline of 37.3%, and an average duration of 289 days, but it takes about 367 days on average to fully recover. The 2020 pandemic bear market, while the shortest on record (only 1 month), was an extreme case. Generally, investors should be prepared for bear markets lasting more than a year.

Key characteristic three: Economic recession and rising unemployment occur simultaneously

Bear markets are often accompanied by macroeconomic deterioration signals such as recession, soaring unemployment, and deflation. Central banks typically initiate quantitative easing policies to rescue the market, but historical experience shows that the rebound before QE is often a bear trap, and the true bottom is usually confirmed only after policy effects take hold.

Key characteristic four: Severe asset bubbles accumulate

Price bubbles are common triggers for bear markets. When asset prices are driven up to the point where no one is willing to buy, a stampede-like crash occurs. This irrational investment enthusiasm often prompts central banks to tighten monetary policy, triggering phased bear markets.

Behind the Formation of a Bear Market

Market confidence collapse is the fuse for a bear market. When economic prospects are bleak, consumers tighten their belts, companies cut hiring, and investors rush to withdraw funds. These triple blows often cause stock prices to plummet in the short term.

Price bubble bursts can trigger chain reactions. Investors who bought at high levels start to sell off, panic spreads, and asset prices fall freely.

External black swan events such as the collapse of financial institutions, sovereign debt crises, and geopolitical conflicts can all be triggers for a bear market. The Russia-Ukraine war, which pushed energy prices higher, and the China-U.S. trade war disrupting supply chains are typical recent examples.

Monetary policy shifts—when central banks raise interest rates and shrink balance sheets to combat inflation—tighten market liquidity, causing stock markets to lose funding support.

Sudden disasters like pandemics, natural disasters, and energy crises can also trigger global market crashes in a short period.

Historical Review: Lessons from the Six Major Modern U.S. Bear Markets

2022: High inflation + geopolitical conflicts + hawkish shift by central banks

Post-pandemic global QE stimulated inflation soaring, coinciding with the Russia-Ukraine war pushing up commodity prices. The Federal Reserve sharply raised interest rates and shrank its balance sheet, causing market confidence to collapse, especially devastating for previously surging tech stocks.

2020: Rapid crash caused by the COVID-19 black swan

From the high of February 12 to the low of March 23, the Dow halved, but it rebounded 20% within two weeks, escaping the bear market. Central banks worldwide released liquidity promptly, delivering the shortest bear market in history.

2008: Deep collapse of the financial crisis

The housing bubble and layered risks of subprime loans wrapped into financial derivatives triggered a chain collapse. The Dow fell from 14,164 to 6,544, a decline of 53.4%, taking over five years to recover to the 2007 high.

2000: The end of the dot-com bubble

Countless high-tech companies with no real profits saw valuations skyrocket, only to crash in a stampede, ending the longest bull market in U.S. history and triggering the recession of the following year.

1987: Black Monday horror

On October 19, 1987, the Dow Jones Industrial Average plummeted 22.62%, marking the most famous single-day crash in Wall Street history. Fortunately, the government learned from the 1929 Great Depression, quickly implementing stabilization measures (interest rate cuts, circuit breakers, etc.), and the market recovered within 1 year and 4 months.

1973-1974: Systemic collapse under stagflation

The Middle East war caused oil prices to soar from $3 to $12, exacerbating existing inflation pressures. The S&P 500 ultimately declined by 48%, with a bear market lasting 21 months, making it the longest and deepest recession in modern U.S. history.

Three Major Strategies for Investing During a Bear Market

Strategy One: Hold Cash and Reduce Risk Exposure

The primary task in a bear market is to protect capital. Reduce holdings of overvalued, bubble stocks, as those that surged most during the bull market often fall hardest in the bear. Keeping sufficient cash to handle market volatility is fundamental to surviving a bear market.

Strategy Two: Select Defensive and Oversold Quality Stocks

For contrarian positioning, focus on defensive sectors like healthcare, which are less correlated with economic cycles, or choose fundamentally strong stocks with deep declines and lasting competitive advantages. These companies should have at least 3 years of moat to rebound when the economy recovers. If uncertain about individual stocks, investing in broad market ETFs for the next recovery is a safer choice.

Strategy Three: Flexibly Use Derivatives

Bear markets have a higher probability of declines. Contracts for difference (CFDs) and other derivatives can be used for short selling to profit from downward moves. However, derivatives are leveraged and carry amplified risks, so caution is essential.

Traps and Methods for Identifying Bear Market Rebounds

Bear market rebounds (also called bear traps) refer to short-term rallies within a downtrend, usually exceeding 5%. Many investors mistake these rebounds for the start of a bull market, only to fall into the trap.

To distinguish a true bottom reversal, observe the following signals:

• 90% of stocks trading above their 10-day moving average
• More than 50% of stocks rising
• Over 55% of stocks hitting new highs within 20 days

Only when the rally persists for months or exceeds 20% can it be confirmed that the bull market has arrived.

Wisdom for Surviving a Bear Market

A bear market is not the end but an opportunity to reallocate assets and discover new opportunities. The key is to identify bear market characteristics early, adjust your mindset quickly, and, while protecting your capital, seek contrarian opportunities.

For prudent investors, patience, strict stop-loss and take-profit rules, and risk control are the right ways to navigate a bear market. When most are fleeing in panic, farsighted investors are already preparing for the next recovery.