This Is Not a Bear Market, but It Looks and Smells Like One

A bear market is generally defined as a fall of 20% or more from recent highs. It is unclear where this definition comes from, but its simplicity makes it much easier to make a general statement about the health of the stock market. Unfortunately, it is too…

vague of a term to have any real value. It tells us nothing about what is really going on under the surface.

The major indexes are not even close to a 20% fall that would qualify as a bear market at this point, but the price action we see in certain areas of the market has the feel of a bear market. This sort of selling that we see in small caps right now is classic bear market action where there are no bids.

What makes bear markets so difficult is that individual stock selection becomes meaningless. Bear markets are mostly driven by correlated selling. The good, the bad, and the ugly are all sold, regardless of their individual characteristics. Valuations don’t matter as the charts deteriorate.

Investors like to believe that they will be protected if they hold “good” stocks, so they just hold on, but are often are surprised at how far a “quality” name with great fundamentals can fall when bear market action takes place. The most common mistake is to grow weary of the poor action and then sell due to frustration and impatience.

One of my favorite sayings is that the bear market doesn’t scare you out, it wears you out. They eventually come to an end with a whimper, not a bang.

When bear market action hits, there really is only one avenue of recourse — do some selling. The most common mistake that is made is to freeze and do nothing. When that happens, the great risk is that you are going to eventually sell out of despair and at the wrong time.

The best advice I can give when you are struggling with a bear market is to…

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