Looking at investment opportunities through the cycle of bull and bear markets: how to find opportunities in a bear market?

Bull and bear markets are like the market’s breathing, alternating as a normal state in financial markets. Many investors enjoy the quick gains of a bull market, but true investing skill often manifests during bear markets. So, what is a bear market? What warning signs does it bring? How should investors respond?

Understanding Bear Markets: Definition and Characteristics

Definition of a Bear Market

A bear market (Bear Market) refers to a market condition where stock prices decline by more than 20% from their highs. This downward trend can last for months or even years. For example, in 2022, the Dow Jones Industrial Average fell from its high of 36,952.65 on January 5 to a close of 29,260.81 on September 26, officially entering a bear market phase.

Conversely, when stock prices rise more than 20% from their lows, it is called a bull market (Bull Market). It is worth noting that the concepts of bull and bear markets are not limited to stocks; they apply to all tradable assets such as bonds, real estate, precious metals, commodities, and cryptocurrencies.

Bear Market vs. Market Correction

It is important to distinguish between a market correction and a bear market. A correction refers to a decline of 10%–20% from a high, representing a short-term adjustment that occurs more frequently and lasts for a shorter period. A bear market, on the other hand, is a long-term, systemic downturn that has a more profound impact on investor psychology and asset allocation.

Key Signals of a Bear Market

1. Stock prices drop more than 20%

The U.S. Securities and Exchange Commission defines a bear market as when most major indices decline by over 20% within two months. This is the most straightforward criterion.

2. Cycles and amplitude patterns

Based on the historical data of the S&P 500 index, over the past 140 years, 19 bear markets have had an average decline of 37.3%, with an average duration of about 289 days. However, the length of bear markets varies greatly—some, like the one triggered by the COVID-19 pandemic in 2020, lasted only a month, while others can last over a year. The last five bear markets averaged a decline of 38%, and breaking previous highs usually takes several years.

3. Accompanying economic deterioration

Bear markets are often associated with macroeconomic issues such as recession, rising unemployment, and deflation. Central banks typically initiate quantitative easing to stabilize the market. However, historical experience shows that most rallies before QE are just bear market rebounds and do not signify a true exit from the bear phase.

4. Asset bubbles accumulation

Commodity prices tend to fluctuate more violently than the actual asset values. When assets are in a severe bubble and investors exhibit irrational enthusiasm, central banks may tighten monetary policy to curb inflation, leading the market into a bear phase.

Deep Causes of Bear Market Formation

Confidence Crisis

When market sentiment is pessimistic about economic prospects, consumers tend to save more and cut back on non-essential spending. Companies slow hiring and expansion due to declining revenues. Capital markets anticipate corporate profit declines, leading to a sharp reduction in buying activity and investors rushing to cash out. The combined effect causes stock prices to plummet in the short term.

Bubble Burst

Prices rise to a critical point where no buyers are left, then reverse. A panic selling effect ensues, accelerating asset price declines, shattering market confidence, and triggering further sell-offs.

Geopolitical and Financial Risks

Major events such as bank failures, sovereign debt crises, or wars can trigger market panic. For example, the Russia-Ukraine conflict pushed energy prices higher and increased global economic uncertainty; U.S.-China trade tensions disrupted supply chains and corporate profits—these are typical recent cases.

Policy Tightening

Interest rate hikes and balance sheet reductions by the Federal Reserve reduce liquidity, suppress corporate and consumer spending, and depress stock markets.

External Shocks

Sudden events like pandemics, natural disasters, or energy crises can cause global markets to crash.

A Brief History of the U.S. Stock Bear Markets: Lessons from Crises

1973-1974: Oil Crisis and Stagflation Shock

After the Fourth Middle East War, OPEC imposed an oil embargo on supporting Israel. Oil prices soared from $3 to $12 per barrel within six months (a 300% increase), intensifying U.S. inflation pressures (CPI had already risen to 8% in early 1973). Stagflation followed—GDP shrank by 4.7% in 1974, while inflation reached 12.3%. The S&P 500 declined from its January 1973 high, ultimately falling 48% over 21 months, making it one of the longest and deepest systemic crashes in modern U.S. stock history.

Black Monday 1987: Program Trading Amplifies Panic

On October 19, 1987, the Dow plunged 22.62%. The crisis was triggered by continuous rate hikes by the Fed, tense Middle East tensions, and the emerging use of program trading, which amplified the decline. The government quickly implemented stabilization measures—interest rate cuts and circuit breakers. Learning from the 1929 Great Depression, the market recovered to previous highs in 1 year and 4 months, quickly digesting the panic.

Dot-com Bubble Burst 2000

During the 1990s internet boom, many high-tech companies went public without solid profits, leading to severe valuation bubbles. The withdrawal of investments triggered a panic, ending the longest bull market in U.S. history. The subsequent recession and 9/11 terrorist attacks further worsened the market collapse.

2008 Financial Crisis: Subprime Storm

Starting October 9, 2007, the Dow fell from 14,164 points to 6,544 on March 6, 2009—a decline of 53.4%. The root cause was the housing bubble: low interest rates encouraged borrowing to buy homes, and banks packaged high-risk loans into financial products sold to others. When home prices soared and then declined after rate hikes, investors pulled back, triggering a chain reaction. The bear market recovered slowly, only returning to 2007 highs on March 5, 2013.

2020 Pandemic Panic: Shortest Bear Market

From the peak of 29,568 on February 12, 2020, the Dow dropped to 18,213 on March 23, but global central banks quickly launched QE to stabilize liquidity, and by March 26, the index had risen 20%, exiting the bear market. This was the shortest bear market on record, followed by two years of a super bull market.

2022 Bear Market: Multiple Pressures

Post-pandemic, global central banks engaged in aggressive QE, leading to rising inflation. The Russia-Ukraine war pushed up commodity prices, further fueling inflation. The Fed responded with significant rate hikes and balance sheet reductions, while tech stocks—those with the largest gains in previous years—became the main decline drivers. Due to continued tightening, markets expect the bear market to last at least until 2023.

Investment Strategies During a Bear Market

Strategy 1: Prioritize Risk Management

Maintain sufficient cash reserves, reduce leverage, and avoid being overwhelmed by market volatility. Reduce holdings in high P/E and high P/B stocks—these are the most bubble-prone, with the largest gains in bull markets and deepest declines in bear markets.

Strategy 2: Select Defensive and Oversold Quality Stocks

Focus on sectors like healthcare and consumer staples that are less sensitive to economic cycles. Also, pick oversold but fundamentally strong stocks with a moat—these companies’ competitive advantages can sustain for over three years, making it easier for their stock prices to recover when the economy rebounds. If unsure about individual stocks, broad market ETFs are a safer choice.

Strategy 3: Consider Short Selling Tools

Short selling has a higher success rate in bear markets. Financial derivatives like CFDs (Contract for Difference) allow investors to profit from falling markets. Many trading platforms offer detailed tutorials and demo accounts, enabling investors to practice thoroughly before live trading.

Bear Market Rebounds: Trap or Opportunity?

What is a bear market rebound?

Also called a “bear trap,” it refers to a short-term rally within a broader downtrend, lasting days or weeks. A rise of more than 5% is generally considered a rebound. This can mislead investors into thinking a bull market has begun. However, unless the market sustains gains for several months or the daily increase exceeds 20%, it should be viewed as a rebound rather than a reversal.

How to distinguish a rebound from a reversal?

Observe these indicators:

• 90% of stocks trading above their 10-day moving average
• More than 50% of stocks advancing surpass the total number of declining stocks
• Over 55% of stocks hitting new highs within 20 days

Only when these conditions are met does a true bull market likely begin; otherwise, exercise caution.

Conclusion

A bear market is not the end but an opportunity to rebalance assets. The key for investors is to identify bear market signals promptly, choose appropriate financial instruments to protect assets, and seek opportunities. Adjust your mindset, stay disciplined—profitability exists in both bullish and bearish phases. For prudent investors, patience, strict stop-loss and take-profit mechanisms, and confidence in long-term value are essential. Markets always cycle, and crises often conceal the best opportunities for strategic positioning.