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The often-repeated claim that a 20% market decline is an "official" bear market is pure Wall Street BS.
There is no official standard for what constitutes a bear market. It's a big lie.
There's no official body to set the standard. And besides, in a world with so many different markets – all with widely different betas and standards of volatility – there can be no universal standard to apply to all markets, all instruments, and all commodities. Not by any stretch of the imagination.
The idea is absurd on its face, yet the media keeps repeating this nonsense ad nauseam.
It's another example of them being clowns and intellectually lazy stooges for the Wall Street establishment.
It would be funny… if it wasn't at your expense.
Don't fall for this…
The Original Bear Standard Is Still the Best
Goebbels said to make a lie really big and repeat it often, and soon enough everyone will accept it as truth.
That's what the "20% rule" for a bear market epitomizes: A coterie of financial media PR flacks kept repeating it, and eventually everyone accepted it as truth.
But bear markets are matters of price patterns and time, not percentages.
A hundred or more years ago, Charles Dow, William Peter Hamilton, and Robert Rhea never once mentioned any percentage when defining a bear market.
Instead they made it a matter of the Dow Industrials and Rails making a secondary low lower than the last low after lower highs, and that each average must confirm the other.
They were never intended as timing tools, but the standard they set is far more reasonable in identifying a bear market than a straight, arbitrary percentage.
They incorporate price direction, pattern, and time, not percentages.
What Dow, Hamilton, and Rhea Are Telling Us Now
So, by the standards of direction, pattern, and time, the U.S. market has been in a bear market since July 2015. That's when both the Industrials and Transports made new secondary lows. The S&P 500 confirmed resoundingly in August.
Since the early 1980s, when I first started using computerized indicators to track price momentum and cycles, we have had the benefit of knowing that momentum precedes the trend.
Momentum slows first, then prices break down later. In fact, very long-term momentum and cycle indicators began to roll over in mid-2014. Late that summer is when I was first able to warn that the market was building a major top.
And more than 100 years of price charts gives us the benefit of knowing that tops take anywhere from 10 to 18 months to unfold before prices break down.
Accordingly, I wrote in the latter part of 2014 that a final price high would probably come in mid-2015, and that the market would head into a bear market after that.
This is not rocket science. We know that history rhymes.
There are differences from one era to the next, but there are sufficient similarities that if we are paying attention, we can recognize the process as it is happening.
Bear market formation is part of a process of the shift in long-term momentum leading to a downtrend in prices. With lower highs and lower lows since last summer, we are now in a major downtrend.
Call it what you want. If you want to wait until it's down 20% to call it a bear market, that's fine with me… But don't cling to that 20% measure as a signal to sell – that's dangerous for your money.
Now, what possible purpose does it serve for Wall Street to pretend that there's an "official" standard for a bear market and that it's 20% down?
That one is easy to answer…
Why Wall Street Lies About Bears
They want to keep you – and everybody else – from selling so that they can distribute their inventories into an orderly market without having to take too much of a market hit to their accounts!
They want to keep you and all their other customers (especially institutions) long the market and buying on the way down so that they can short stock to you.
Then, once they have built large enough short positions, they pull the plug by pulling their bids, letting prices fall while they pile up profits on their short inventories.
Then when the S&P 500 or the Dow is finally down 20%, and their media stooges declare an "official" bear market, you can bet your last dollar that, as the public panics, a capitulation low will be set within a few days and a decent-sized intermediate-term bear market rally will unfold from there.
It will be just another bear market rally that fools the majority into going back to sleep as their portfolios depreciate.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.