Why Does -20% = Bear Market?
• Battered by Oil, Dow Touches Bear Territory (New York Times)
• Dow Hits Bear-Market Territory (Wall Street Journal)
• Stocks Near Bear Market Territory (U.S. News & World Report)
• US stocks post sharp weekly losses; bear market nears (MarketWatch)
• This Bear Has Sharp Claws (Barron's)
• Market ends lower, Dow on cusp of bear market (Reuters)
• Stocks Tumble Toward Bear Market On Rising Economic Concerns (Washington Post)
~~~
The latest commentary I seem to be having a hard time with is this weird obsession with minus 20%. What makes this number, as opposed to 15%, 25%, or even 36.54% special?
Consider this somewhat bizarre commentary:
Stocks fell on Friday, pushing the Dow to the brink of a bear market, hounded by concerns that record oil prices and the seemingly endless credit crisis will further damage the economy. Friday's decline built on Thursday's rout in which the Dow fell about 360 points, and rounded out its worst week since February 10.
While the blue-chip Dow average briefly dipped into bear market territory, it managed to close above that level, thus narrowly avoiding the official onset of a bear market, or a 20 percent drop from its all-time high. (emphasis added)
>
What is the magic about 20%?
What makes this the "official" onset of a bear market? There isn't any NBER-like group that declares an "official" bear market.
Best as I can figure, the 20% number is a not-quite-a-random number -- more than a 10% correction, less than a full blown crash (which for all we know, could be "offically" 30%).
I have no idea who first started bandying about these nice round base ten numbers -- but for whatever reason, they seem to have stuck in the public and the press' imaginations. (Anyone have a better idea where these two figures came from?)
Forget the rather squishy terminology, and consider the following economic, fundamental and technical questions:
• Is the Economy expanding or contracting? Have recent data points been improving or worsening?
• Are corporate earnings getting stronger or weaker? Where are we in the earnings cycle?
• Are stock prices generally rising or falling?
• Are market advances narrow or broad? Is the volume expanding on up days, or on down days?
• Is investor Psychology greedy or fearful?
Rather than focus on terminology, investors should be considering their risk management strategies, what they are doing to preserve capital, and how they are psychologically prepared to deal with what could be an extended downturn.
That matters a whole lot more than whether something is called a bull or bear market...
~~~
Sunday, June 29, 2008 | 07:57 AM | Permalink
| Comments (69)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00e5537964d38833
Listed below are links to weblogs that reference Why Does -20% = Bear Market? :
Comments
Yes, in a sane world, the fundamentals would be more important than the sound bite. In a more sustainable world, this would be the case. Yet, in the world as it exists today and actually operates, this isn't so clearly or confidently answered.
Media, we know, emphasize 'the narrative'. "The Narrative", in turn, tends to demand reduction to sound bites -- and, also, tends to play out the story to its conclusion. In that sense, the 'narratives' preferred by media have a kind of 'scoop' quality to them -- the hope that those crafting the narrative have 'scooped' the future by telling us what the future will bring.
"Bear" market as sound bite fulfills all this. It tells us in short hand what the narrative is -- and how this narrative will play out. It is counterpoised, we know, against the competing narrative of "the worst is behind us" or "this will be a mild correction" and so forth.
And, so, we forfeit an orientation toward problem-solving in favor of talking heads/screaming heads battling over sound bites and illusions.
Posted by: Doug | Jun 29, 2008 8:10:05 AM
Nope. It's just the lizard brain attempting to feel in control by imagining patterns when all that exist are random events that influence cause and effect relationships. It's the lazy person's way to justify being lazy. This is one reason why some compare technical analysis to astrology ... "our fate is not ours, but controlled the stars ... and the technical indicators".
Personally, I like some technical indicators in the way that someone might use statistics for hypothesis testing, providing I can support my observation with solid facts that make sense.
Posted by: cinefoz | Jun 29, 2008 8:26:43 AM
Best as I can figure, the 20% number is a not-quite-a-random number
No more or less random than the technical analysis crap that people spew. Its valid because everyone says its valid.
(The fibonacci people are especially amusing, though I'm surprised they didn't settle on Galois primes in order to sound more authoritative.)
Posted by: JP | Jun 29, 2008 8:27:13 AM
[Hmmmmm. It seems that cinefoz has also unplugged from the matrix.]
Posted by: JP | Jun 29, 2008 8:29:00 AM
Dammit .. I meant to type
This is one reason why some compare technical analysis to astrology ... "our fate is not ours, but controlled BY the stars ... and the technical indicators".
Posted by: cinefoz | Jun 29, 2008 8:29:11 AM
My post is a little bit off-topic here. (I'll be brief.)
If Trichet RAISES interest rates next Thursday even by 25bps that isn't going to be good for BB. TALK of a stronger US Dollar will no longer be adequate for our markets. Whew!!
I just get this sense that Europe in concert with the Middle East is busting Bush's balls in an attempt (quite effectively I might add) to force out as many Republicans as possible before the election.
Between trashing the US Dollar (which we admittedly are largely responsible for), supporting the peak-oil view (in being stingy about pumping more oil) and the ECB having NEVER lowered interest rates (even once) since last Fall makes me think it is a concerted effort to force a massive change in the political landscape in the US come November. It is also fair to just say, they haven't helped the US when they could have.
IF parties outside the US continue to counteract, offset or thwart what BB and others do here in an attempt to stabilize our financial markets, it could REALLY get UGLY leading up to the election.
If they raise on Thursday, then (that tells me) nobody is playing ball with the US and are just simply piling on.
Posted by: BG | Jun 29, 2008 8:39:48 AM
The 20% number is arbitrary....as is 2 negative quarters of GDP.
To begin with, you can't have a recession unless you first have a credit induced boom. A recession is nothing more than the liquidation of all the malinvestments that occured during the boom.
The crisis (contrary to popular opinion) is the credit-fueled boom, not the recession...The recession is a return to reality.
So the question is not 20%, or 2 quarters of negative GDP....The question is: "Are the malinvestments created during the boom being liquidated?"
Posted by: Chris | Jun 29, 2008 8:43:11 AM
Somebody probably looked at past periods where the market was flat for 20 year periods...they are pretty easy to spot on a chart (even the Elliot Wave guys do it) and they said well they seem to fall about 20%. But it seems to me that there should be no definitive number that needs to be hit...it's like what makes porn offensive?...can't define it, but know it when I see it.
Posted by: Steve Barry | Jun 29, 2008 8:51:31 AM
Could this be the Barry Ritholtz Contrary Indicator?
In January, the end of the world was being forecast here, much more strenuously than in previous weeks. S&P 1100ish was in the cards for later this year. Bear's collapse was somewhat unexpected, but supported the theory. Then, the market went up up and away. It would have kept going if the oil thieves didn't ramp up their ponzi scheme. This may be shut down soon. Now, due to another random event (oil), the market is falling and the pessimists are piling on.
Cha Ching!
~~~
BR: Here in January, we discussed why you can trade from the long side for a 8 to 12% pop.
I do not recall an "End of the World" forecast, but, rather than incorrectly put words in my mouth, perhaps you can point us to a link ?
Posted by: cinefoz | Jun 29, 2008 8:58:45 AM
Random points that few are discussing...
I have metioned my put/call charts this week showing we are nowhere near an oversold bounce. Anyone ever look at the Commitment of Traders? It shows futures and options traders only very slightly bearish. Not calling for a bounce at all.
If a short covering rally were coming, you would see much higher Short Interest on Nasdaq. Click through the link and I have put all the top names in the dropdown for you. Short interest is very low. perhaps instead of shorting, evrybody bought QID? But then we would see a massive rise in puts, as that's how QID moves inverse to QQQQ. So I think the short interest is way too low.
Bush claims to have created 5 million jobs...I read that 40% were real estate (ie BUBBLE) related. Everyone of those jobs is not needed in a normal housing market. Plus wall street alone probably created 100K related jobs or so. Therefore no bottom until around 3 million jobs are lost if you include Detroit going BK.
Posted by: Steve Barry | Jun 29, 2008 9:05:07 AM
There are so many given principles: Implicit volatility in option maths, two consecutive negative growth in GDP to make a recession , Taylor rule (no longer applied or referred to), equities crash a market being down by 20 or 25 pct ?
Why argue about 20/25 PCT equities downfall being a bear market definition when getting trapped in the semantic is already agreeing on the assumptions.
Posted by: Philippe | Jun 29, 2008 9:12:37 AM
I agree with JP. Cinefoz coming back to life can only mean the market is ready to bounce up.
I am just glad I pulled my 401K out last Sept (posted here then, for you non-believers).
I have several Fast Money, Kudlow, Cramer shows recorded from the last year. Listening to Kneale, Luskin, Ferral, Bowyer is great for comedy hour. And still today all of those perma bulls are claiming "no problems". Joe Bat, Garry Schilling and our own Barry had to take some heat on these shows but now time has told the tale. Congrats BR!
I am a daytrader, Cinefoz does actually have one thing correct. Most T/A is just numbers. Took me a long time to realize its all about Price, Price and the reaction to Price, thats all that matters. And Price Action as of the last 8 months says bear market. I could care less about -20%.
O/T, Price action last week was strange, it seems that everyone is waiting for capitulation so no one wants to buy yet, however no one wants to sell into the 'hole'.
Good luck all and remember the tradeable bottom that should be coming soon is a trade only and those Bear market rallies should be sold into. IMO
Posted by: B.B. | Jun 29, 2008 9:14:54 AM
Twenty percent is arbitrary, but it more or less corresponds with the typical market decline in a typical recession. [BR: actually, its more like 30%]
At 10%, plenty of market dips are printed which have nothing to do with recession. 30% ends up being too deep: plenty of recession-induced slides (e.g., 1970, 1990) never go that far.
So 20% ends up being a good rule of thumb. Not every 20% market dip produces a recession; nor does every recession produce a 20% market dip (e.g., 1953). But at the 20% threshold, the number of 'errors' in each direction are roughly equal.
Posted by: Jim Haygood | Jun 29, 2008 9:23:16 AM
All T/A is prone to failure, but I have found a well placed support/resistance line is always a good guide. One under appreciated TA is VOLUME. Remember I kept harping on a daily basis that QQQQ volume for like 50 straight days during rally from March lows could not reach its 100 day average? It caused me to fully discount the rally and stay short. It was poven correct, as amost everyday since June 12, volume has broke its 100 day and QQQQ is down almost 10%. It is rock solid proof the QQQQ is rotten to the core...and trades at a hefty 35 times earnings and 1.9 times sales in a crisis environment. It should actually trade at maybe 17 times earnings and 1 times sales if a depression is averted.
Posted by: Steve Barry | Jun 29, 2008 9:26:34 AM
Steve,
Yes, couldn't agree more. I do use simple S/R and trendlines when I daytrade and constantly watch volume. Your january call can still work out, we have 6 more months. Enjoy your posts, good work.
Posted by: B.B. | Jun 29, 2008 9:41:29 AM
I know what you're thinking. "Is the market down 20% or is it only 19?" Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is your life's savings, without which you wouldn't have a dime in the world, and might as well blow your head clean off, you've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?
Posted by: Winston Munn | Jun 29, 2008 9:45:08 AM
BB,
Thanks..the whole basis for my Jan call was recession cannot be averted and S&P should trade for at most one times sales in a recession..even that is very generous.
Posted by: Steve Barry | Jun 29, 2008 10:05:31 AM
When I get to be dictator all numbers tossed to the public must be prime numbers.
No more numbers with factors of ten (or five). Thus, 23% decline, not 20%, means fear of bear market.
Same for all estimates.
By order of the Dictator.
Posted by: John | Jun 29, 2008 10:08:36 AM
"I have no idea who first started bandying about these nice round base ten numbers -- but for whatever reason, they seem to have stuck in the public and the press' imaginations. (Anyone have a better idea where these two figures came from?)"
Actually we use them because we have ten digits. Seriously. If we had nine digits, a bear market would probably mean an 18% decline.
~~~
BR: Yes, that's what I meant by Base Ten numbers . . .
Posted by: Bodz | Jun 29, 2008 10:08:42 AM
Winston,
So what are you doing with your 'Fistful of Dollars?'
"I gotts ta know."
Posted by: Pool Shark | Jun 29, 2008 10:13:37 AM
Great points, Barry. Were we to not have opposable thumbs, pundtry would likely proclaim that -16% would be the threshold before a bear market could be declared.
The same mentality is seen in the focus on indices and other aggregate measures as in the chase for low apparent/hedged risk for high yield. Intellectual laziness drives this myopic focus while the alternative requires that the effect of econometrics be: a) understood; and b) explained.
It's far too much to expect.
I like to imagine what would have happened had the billions sunk into real estate via ABS/MBS instead had been invested in actual ||shudder|| domestic businesses. We could have avoided some of this poorly real-world-tested structural & counterparty risk.
Posted by: teraflop | Jun 29, 2008 10:16:33 AM
I agree with you in that -20% is not a particularly useful measure, but the reason it is used goes back to statistics. If you use a particular number to define a bear market, then you can run stats on how long they last, what the average decline is, and what investors can expect.
But that argument is a bit ironic when considering that each of the stories that I read this week begin with some statement like "all bear markets are different and cannot easily be classified." So what is the point in running all those statistics if they really don't tell us anything. As with any other statistical measure, the concept of "garbage in, garbage out" applies.
Thanks for voicing your concerns.
Posted by: Zach | Jun 29, 2008 10:16:59 AM
Pool Shark wrote, "So what are you doing with your 'Fistful of Dollars?"
Trying to get it to earn "A Few Dollars More" but the portfolio is going from good to bad to ugly.
Posted by: Winston Munn | Jun 29, 2008 10:24:03 AM
IMHO, a bear market is when the 200 DMA is in a downtrend with the 50 DMA below it.
Posted by: trade | Jun 29, 2008 10:31:45 AM
Humans are social creatures, and part of behavioral finance must surely be the numbers we decide (as a group) are important.
Why were people looking for specific gasoline prices $3.50, $4.00, to form a tipping point?
I think it's the same reason that 20% can be a bear market ... some numbers feel different, and some numbers help build a consensus belief.
Posted by: odograph | Jun 29, 2008 10:37:05 AM
