Bear Market

Dow Theory would state that when the Dow Jones Industrial Average is in a downtrend, or in other words when each successive low is lower than the previous one and each successive high is lower than the previous high, then the stock market is known to be in a bear market.

Peter Lynch calls a 10% drop in the stock market a correction and a 20% drop in the stock market a bear market, though that may be a rough definition.

A bear market is usually only noticeable after it has commenced for a while, as market participants usually believe it is a correction early on and do not consider it a bear market until it is full-fledged.

A bear market is usually around one year long and usually coincides with a recession in the economy.

A bear market is usually characterized by sharp spikes in the stock market(also known as “dead cat bounces”). Market commentators usually repeatedly call bottoms unsuccessfully in a bear market. According to Jesse Livermore, the stock market generally closes weakly in a bear market no matter how strong the open might be.

A bear market may be a nightmare for a trader unless he is a short seller, but may also provide an excellent opportunity for a long term investor to buy more good stocks cheaply.

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