Why Does -20% = Bear Market?

Sunday, June 29, 2008 | 07:57 AM

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)

-Reuters

>

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)
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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

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