What are the characteristics of a bear market? How to survive during a market downturn?

Recently, as I watch the stock market, I am always tormented by the same question: "Is this really the bottom? Or will it drop further?" Investing during a bear market feels like groping through the darkness.

What is a Bear Market? My Definition

A bear market ( refers to a state in which market prices decline by more than 20% from their highs, and this downward trend continues for several months to years. For example, the Dow Jones Industrial Average officially entered a bear market in 2022, falling from a high of 36,952.65 on January 5 to 29,260.81 on September 26.

To be honest, this "20% rule" is merely a guideline in the industry. The true essence of a bear market lies in the fear of asset values diminishing daily and the anxiety of "when will it end?"

A bear market occurs not only in the stock market but also in all asset classes, including bonds, real estate, precious metals, commodities, foreign exchange, and cryptocurrencies. In other words, our assets are not safe no matter where we try to escape.

Bear Market Signals: Characteristics I Don't Miss

) 1. A drop of more than 20% from the high

It's a simple number, but this is the first warning sign. However, it varies by indicator, and the U.S. Securities and Exchange Commission defines a bear market as "when a major stock index falls by 20% or more over at least a two-month period."

2. A long suffering that lasts an average of 367 days.

Taking the S&P 500 index as an example, bear markets typically reverse after an average decline of 38%. In the 19 bear markets over the past 140 years, the average decline was 37.3%, and the average duration was 289 days. The COVID-19 shock in 2020 was an exception, as it ended in just one month, which is a rare case.

Ultimately, a bear market is a marathon that tests our patience.

3. Economic recession and high unemployment rates always affect

Bear markets are often accompanied by economic recession, high unemployment rates, and deflation. Therefore, central banks try to save the market through quantitative easing. But history teaches us that the rise before quantitative easing is merely a "bear trap." It's truly an elevator to hell.

4. The Collapse of the Asset Bubble

In the early stages of economic expansion, bear markets rarely occur. However, when assets are in a bubble state and investors are showing irrational exuberance, central banks tighten funds to curb inflation. As a result, the market enters a cyclical bear market, leading many individual investors to cry out.

Causes of the Bear Market: From My Experience

Bear markets are formed by a combination of multiple factors. Below are the main triggers that I have seen many times:

• Loss of Market Confidence: When consumers feel anxious about the future economy, they save cash, businesses restrain hiring and capital investments, and the capital market anticipates a decline in corporate earnings, leading to a disappearance of buyers. This vicious cycle results in a sharp drop in stock prices.

• Excessive Price Bubble: When the market overheats and asset prices soar to levels that no one wants to buy, panic selling accelerates as the decline begins. This is referred to as the "stomp effect," which further accelerates the sharp drop. I have experienced being engulfed by this wave several times.

• Financial and Global Risks: Major events such as the collapse of financial institutions, sovereign debt crises, and wars can trigger market panic. An example is the Russia-Ukraine war, which drives up energy prices, or the US-China trade war, which disrupts corporate supply chains.

• Monetary Tightening: Measures such as interest rate hikes and quantitative tightening reduce liquidity in the market, suppress spending by businesses and consumers, and put pressure on the stock market.

• External Shock: Natural disasters, pandemics, and energy crises can trigger crashes in global markets. The global panic in 2020 due to the COVID-19 pandemic is one such example.

Investment Strategies in a Bear Market: My Approach

Strategy 1: Reduce Portfolio Risk

In a bear market, you should secure enough cash to protect yourself from market fluctuations. Reduce leverage and cut back on investments in stocks with high PER and companies that only sell dreams. Stocks that surged during the bubble period tend to drop even more during a bear market. I have felt this lesson repeatedly.

Strategy 2: Targeting high-quality stocks and undervalued stocks

If you want to invest while securing cash, it is advisable to focus on sectors that are less affected by economic fluctuations, such as healthcare and niche industries. Additionally, high-quality stocks that have significantly declined are also worth targeting. However, the condition is that the company must have a sustainable competitive advantage (economic moat) for at least three years. Otherwise, even if the market recovers, there is a possibility that the stock price may not return to its highs.

If you are not confident in identifying individual stocks, investing in index ETFs is also an option. If the economy recovers in the next cycle, it should return to an upward trend.

Strategy 3: Selection of Financial Products Suitable for Bear Markets

In a bear market, the probability of a decline is high, so the success rate of short selling also increases. Investors can short sell using CFDs (Contracts for Difference). Since CFDs allow both buying and selling, there are opportunities to profit in both bull and bear markets. Leverage can also be used to enhance capital efficiency.

However, since CFDs can lead to significant losses, it is recommended to practice on a demo account before actually investing. Personally, I make it a point to test my strategies on a CFD demo account during bear markets before engaging in real trading.

What is a Bear Market Rebound? How to Identify It

A bear market rebound, also known as a "bear trap," is a phenomenon where a rebound occurs during a downtrend, lasting from a few days to a few weeks.

Typically, a rise of more than 5% is considered a rebound. This can lead investors to mistakenly think that the market has already reversed and a new bull market has begun, but markets do not move in a linear fashion. Until a continuous uptrend is observed for several days or months, or until there is a rise of over 20% to escape a bear market, it should be seen as merely a rebound.

To distinguish between a bear market rebound and the beginning of a full-fledged bull market, we look at the following indicators:

1. 90% of the stocks are above the 10-day moving average.
2. There are stocks that have risen by more than 50%.
3. More than 55% of the stocks have reached new highs within 20 days.

However, to be honest, I feel that it is extremely difficult to determine the true bottom even when following these indicators.

Finally

Bear markets are not scary! The important thing is to quickly determine the beginning of a bear market and use appropriate financial products. While protecting your assets, you can also find investment opportunities through short selling. By preparing your mindset and grasping the timing, there is potential to make profits in both rising and falling markets.

For a prudent investor, the most important thing in a bear market is sufficient patience and the strict implementation of stop-loss and profit-taking on any investment. I believe this is the only way to protect one's assets.