What is a bear market?
There is nothing the bull dreads more than the stock market getting attacked by the bear. However, what do these animal symbols really mean? The answer to that question lies in the way bulls and bears fight.
A bull charges head-on, kicking and sending anything in its path up with its horns. This is what happens when the bull market strikes and stock prices go up, often to a point where they are no longer a realistic match for their performance. This is when bulk selling happens and profits are registered.
In the bear market, shares decline, much beyond their expected prices, just as a bear claws and pins its opponent in a fight. Naturally, selling when the bear has taken over the stock market often leads to losses. But, waiting anytime longer can lead to enormous losses.
So, by this definition, it would seem that the stock market should always be run by the bull. But then how and why does the bear come into the picture?
What causes a bear market
A bear market is not to be confused with a correction. Often when equities are overpriced, market indicators hint at an overdue correction. A correction happens when the share falls by 10 per cent minimum or more from its preceding peak and this decline could very well go on for up to two months. However, it’s a short-haul decline and many shares often rise back up and even beyond their forecasted peaks.
In the case of a bear run, it could be for one sector, one share, or even the whole index. A bear run can also last for years at a stretch, with prices constantly depreciating or not moving enough to cause wealth appreciation.
So, what causes this rough patch?
The longest bear spells in the past have almost always been due to the following factors:
- A long bull season
- Inflation rates
- Increase in interest rates
- Unfavourable monetary policies
- A slump in business/transactional activities
Is a bear run unavoidable
In recent history, with stock markets all over the world going sky-high post the pandemic, warnings and expert recommendations to book profits have been going off. The bear market is supposedly just around the corner. However, it isn’t here yet. There have been corrections in the Sensex, but it’s the first time it has tested and maintained a level of 54,000+.
From here on, it could either be a quick walk to 60,000 points or it could be a sudden dump, maybe even all the way back down to 40,000 points, which was the pre-pandemic level.
Considering how business activities and financial performance was impacted during the pandemic, one would imagine this hike is unreasonable. We have been hearing the alarm bells going off since December 2020, with economists and market biggies preparing us to “brace for an impact”.
But, here we are in August 2021, and it’s all well. So have we avoided a bear season this time around?
That is a hard question to answer. No one can predict for sure. However, considering the rise, it’s natural to assume there would be falls too. Many experts believe that what follows is a long consolidation period, which could stretch for years. Even if we haven’t avoided the bear yet, and the market falls beyond 10 per cent, we could still be looking at a silver lining here.
Advantages of a bear market
It can be unnerving to shell money out during a market that won’t stop falling. However, there is an upside:
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Benefit of compounding:
A bull run is never a good time to invest, as most shares are overpriced when the indices won’t stop climbing. However, one has to get into the market somewhere. If you have entered during the bull’s match, you have the opportunity to lower your buying prices when the bears hit. The bear market would burrow the prices much lower than expected to help you average your cost out.
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Get valuable companies in the portfolio:
The bear market is where quality investors are made who believe in value investing. When the market slumps, quality firms too. A decline is a perfect opportunity to stock up and prepare for a long-term profit.
Bear market investing strategies
The above points make a good case for why an investor could look into buying more during a bear spell, however, how does one make profits during the bear’s regime. This is how:
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Balancing your portfolio for a bear market:
Certain sectors are known to perform better during the bear time. FMCG, personal care, food and other industries which profit from rising inflation rates could help. Debt funds also provide stable, although lesser, gains during a bear market.
Bear market trading strategies
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Sell short:
The investor borrows shares in return for lending fees and sells them at a higher price in the market. Since the shares were borrowed, they have to be returned after a fixed time. When the market further slides, the investor buys the shares again at lower prices and returns them. It works in a bear market when shares get cheaper by the day.
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Buy on margin:
The investor buys shares on the money borrowed from the broker and sells them at a higher price. The borrowed money is returned with interest and the remainder is the profit.
For more useful tips on how to invest and make profits during a bear market, sign up on TradeSmart.
