Understanding the Market Truths Through Bull and Bear Cycles: Recognize Bear Markets and Seize Investment Opportunities

The Bull and Bear Market Cycles Are the Eternal Laws of the Market

In the long course of financial markets, bull and bear market cycles are like tides that repeat endlessly. Many investors enjoy the wealth effects brought by bull markets but find themselves unprepared when bear markets arrive. In fact, the true test of an investor’s wisdom often occurs at the turning point of these bull and bear cycles.

What Is a Bear Market? How Is It Defined?

A bear market refers to a market condition where the price of an asset drops more than 20% from its high. This decline can last for months or even years. For example, in 2022, the Dow Jones Industrial Average fell from its high of 36,952.65 points on January 5 to a closing of 29,260.81 points on September 26, a decline of over 20%, officially marking a bear market.

Conversely, when an asset’s price rises more than 20% from its low, it enters a bull market phase. It is important to note that the concepts of bear and bull markets apply to all asset classes—stocks, bonds, precious metals, cryptocurrencies alike.

It is crucial to distinguish that a bear market and a “market correction” are two different concepts. A correction refers to a price decline of 10%–20%, which is a short-term adjustment; whereas a bear market is a long-term, systemic downturn that has a more profound impact on investment portfolios.

Signs of an Approaching Bear Market

Stock prices reach a critical decline

When most stock indices fall 20% or more within two months, the market has entered a bear market zone. This is the official standard and a signal for investors to be alert.

Average duration and decline of bear markets

According to historical data, in the 19 bear markets experienced by the S&P 500 over the past 140 years, the average decline was 37.3%, lasting about 289 days. The most recent five bear markets had an average decline of 38%, and it typically takes several years for the market to recover from the bottom to surpass previous highs.

Economic recession and rising unemployment occur simultaneously

Bear markets are often accompanied by economic downturns, high unemployment, and deflation. Central banks usually initiate quantitative easing policies at this time to stabilize the market. Historical experience shows that prior to the start of QE, markets often experience a rebound within a bear market, but have not yet fully exited the bear zone.

Asset bubbles have reached extreme levels

When irrational investment booms occur and asset prices deviate significantly from fundamentals, it signals that a bear market is brewing. Central banks’ tightening policies to curb excessive inflation often trigger phased bear markets.

Causes of Bear Markets: Multiple Factors Intertwined

Collapse of market confidence

When confidence in economic prospects erodes, consumers hoard cash, companies cut back on hiring and investment, and investors significantly reduce buying. The combined effect often leads to sharp stock price declines in the short term.

The contagion effect of price bubbles

After assets are overhyped, market participants become risk-aware and start selling off, accelerating the decline and ultimately leading to a collapse in confidence.

Geopolitical and financial risks

Conflicts like Russia-Ukraine, rising energy prices, US-China trade wars disrupting supply chains, bank failures, or sovereign debt crises can instantly trigger market panic.

Rapid shifts in monetary policy

Federal Reserve rate hikes and balance sheet reductions significantly decrease liquidity, suppress corporate and consumer spending, and directly impact stock market performance.

External shocks and systemic risks

Pandemics, natural disasters, or energy crises can cause intense global market volatility, such as the worldwide panic triggered by COVID-19 in 2020.

Historical Review of Bear Market Cycles

2022 Bear Market: Multiple pressures converge

The 2022 bear market began on January 4, driven by excessive global monetary easing post-pandemic leading to soaring inflation, compounded by the Russia-Ukraine war pushing up commodity prices. The Fed was forced to raise interest rates sharply and reduce its balance sheet. Under the dual blow of declining confidence and tightening policies, previously strong-performing tech stocks suffered heavy losses.

COVID-19 Impact in 2020: The shortest bear market

From the high of 29,568 points on February 12 to the low of 18,213 points on March 23, and then rebounding to 22,552 points on March 26 (a 20% increase), the market exited the bear zone. This was the shortest bear market in history. Central banks worldwide learned lessons from the 2008 subprime crisis and quickly launched QE to stabilize liquidity, leading to two consecutive years of super bull markets.

2008 Financial Crisis: The deepest wound

The bear market started on October 9, 2007, with the Dow Jones dropping from 14,164.43 points to 6,544.44 points on March 6, 2009—a decline of 53.4%. Low interest rate policies fueled a housing bubble, and excessive leverage in subprime loans finally triggered the financial system collapse. It took over five years for the Dow to recover to 14,253.77 points by March 5, 2013.

2000 Dot-com Bubble: The cost of speculative hype

Many high-tech companies went public without profits, driven solely by concept hype to attract investment. When capital started to withdraw, a stampede ensued, causing a stock market crash. The subsequent recession and 9/11 terrorist attacks deepened the market trauma.

1987 Black Monday: Market self-repair

On October 19, the Dow industrials plunged 22.62% in a single day. Program trading caused automated sell-offs, further accelerating the decline. Fortunately, the government quickly implemented stabilization measures (interest rate cuts, circuit breakers), and the market recovered within 14 months. Compared to the decade-long recovery after the 1929 Great Depression, this crisis was resolved much faster.

1973–1974 Oil Crisis: The shadow of stagflation

The Middle East war led to an oil embargo, causing oil prices to soar from $3 to $12 per barrel (a 300% increase) within six months. High inflation and recession appeared simultaneously (stagflation), with the S&P 500 falling 48% and the Dow halving. The 21-month-long bear market saw ineffective rate hikes by the Fed, with economic recovery still distant.

How to Invest During a Bear Market

Strategy 1: Rebuild the risk structure of your portfolio

During a bear market, maintain sufficient cash reserves and reduce overall leverage. Also, cut back on “fantasy stocks” and high P/E ratio assets, as these tend to fall the hardest in downturns.

Strategy 2: Find safe havens in a bear market

Besides holding cash, consider allocating to relatively resilient assets like healthcare stocks and niche products. Another approach is to select fundamentally solid stocks that have been oversold. Use historical P/E ranges as reference, and enter positions gradually at relatively low levels, holding long-term.

The key is that these assets must have enough competitive moat to sustain their advantage for at least three years. If individual stock prospects are uncertain, consider broad market ETFs and wait for the next economic recovery cycle.

Strategy 3: Short-selling opportunities in a bear market

Bear markets have higher probabilities of decline, increasing the success rate of short-selling. Investors can use Contracts for Difference (CFDs) to short the market. These financial instruments allow traders to profit from falling markets, and many platforms offer demo accounts to reduce real trading risks.

Distinguishing Bear Market Rebounds from True Bottoms

A bear market rebound (also called “bear trap”) refers to short-term rallies lasting days to weeks within a downward trend. An increase of over 5% is often considered a rebound. Such rallies can mislead investors into believing a new bull market has started, but unless there are continuous months of gains or a rise exceeding 20% away from the bear zone, it should be regarded as a rebound.

Indicators for judging the bottom

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 conditions are met, the signal for a true bottom becomes more reliable.

Summary: Investment Wisdom in Bull and Bear Cycles

The arrival of a bear market is not the end of the world but a test of investors’ judgment and execution. Adopting appropriate strategies at different stages of the bull and bear cycles is the right way to protect and grow assets.

Investors should remain rational during market panic, using suitable financial tools to control risks. For conservative investors, patience and discipline are paramount during bear markets—strictly executing stop-loss and take-profit orders, protecting principal, and preparing for the next bull run.

Remember: In bull and bear cycles, both long and short positions can be profitable; the key lies in whether you grasp the market pulse.