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How to Identify Bull and Bear Trends

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Bull and Bear Symbol with Stock Market Concept.


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A “bull market” in financial assets means that prices are trending up, with higher highs and higher lows. Conversely, a “bear market” in financial assets means prices are trending down, with lower highs and lower lows.

Key questions for investors

Bear markets are a major concern for investors. If stocks and other financial assets have been in a bull market uptrend, the investor’s life will be easy, stress-free, full of unicorns and rainbows! But unfortunately, this is not the case.

In addition to causing huge losses and overwhelming stress, the devastation of a bear market could last for decades. For example, it took the S&P 500 about 25 years to return to its 1929 peak. It took Nasdaq about 15 years to get back to the peak of the “tech bubble” in 2000. It took about 28 years for gold to return to its 1980 peak. Thirty-two years later, Japanese stocks are still around 35% below their 1989 peak – down 80% 20 years after that peak (despite decades of interest rate policy at 0%)! Two to three decades of losses are beyond what most investors can afford emotionally or financially, especially those retiring or nearing retirement.

But what can investors do about a bear market? Is there a solution to this critical problem?

Most Wall Street advisors will tell you to always stay fully invested in stocks “in the long run” (which keeps their fees flowing uninterrupted) because it “cannot time the market”.

They are right that it is impossible to “time the market” or consistently choose tops and bottoms. But when they convince you that you cannot make a lot of money (or at least avoid huge losses) by learning how to identify key bear market indicators and act wisely on those indicators, they are wrong.

This is important because we see a number of factors that suggest the next bear market is the worst since the Great Depression, as we discuss in this Seeking Alpha article. It’s also very timely given the weakness we’ve seen so far this year in global equities and most other “risk-on” assets, including Bitcoin, which we discuss in this Seeking Alpha article.

Major Bull and Bear Technical Indicators

There are a number of technical indicators we track that can objectively prove that the stock market is in a bull or bear trend, including breadth indicators such as advance and decline lines, new highs and lows.

In addition to those indicators that are very useful for identifying stock market trends, there is a very simple and proven technical tool that can be used to determine bull and bear trends in any financial asset: the simple moving average.

A simple moving average is just a line on a price chart that shows the average price of an asset over a given time period. It “moves” each trading day as the new day is added and the oldest day is dropped. Moving averages are useful for evaluating trends because they remove the noise of daily price movements and help you see trends more clearly.

We like to focus on these key simple moving average time periods:

1. 20-day moving average (20-dma) – about a month of trading days to assess short-term trends

2. 60-dma – about three months of trading to assess medium-term trends

3. 250-dma — about 12 months of trading days to assess long-term trends

To smooth out trends and reduce the risk of “fakes”, we typically use the following technical rules to determine when a bullish uptrend is in place:

1. The price is higher than 250-dma,

2. 20-dma is higher than 250-dma,

3. 60-dma is higher than 250-dma and

4. 250-dma slope is positive

Instead, we typically use the following technical rules to determine when a bear market downtrend occurs:

1. The price is less than 250-dma,

2. 20-dma is lower than 250-dma,

3. 60-dma is lower than 250-dma and

4. 250-dma slope is negative

Now let’s see how these simple technical rules can help you make decent profits in both bull and bear markets.

S&P 500 Bulls and Bears

The chart below shows the price of the S&P 500 (black line) and its 250-day moving average since 1980. We have drawn red circles around the periods when the price fell below the 250-day SMA and the slope of the 250-day SMA declined.

S&P 500 since 1980

S&P 500 since 1980 (StockCharts.com)

Six of the eight “bear market” periods were relatively short-lived. Acting on them usually leads to a more or less break-even result.

But two of them—the tech bust of the early 2000s and the Great Recession of 2008-2009—were major bear markets, and substantial profits can be made by investing in “inverse” ETFs that make money in bear markets. We discussed these ETFs in our previous Seeking Alpha article.

The Tech Depression of the Early 2000s

The chart below of the SPDR S&P 500 ETF (SPY) shows the Tech Bust bear market in the early 2000s. The price of SPY is shown in orange, 250-dma in red, 60-dma in green, and 20-dma in blue.

Espionage in the early 2000s

Espionage in the early 2000s (StockCharts.com)

From November 2000, when SPY’s price and both the 20-day and 60-day moving averages fell below the 250-day moving average, until bottoming out in October 2002 nearly two years later, SPY fell about 41%. By June 2003, when SPY’s price and both the 20-day and 60-day moving averages rose above the 250-day moving average, SPY had fallen about 24%.

If one held SPY during these clear signal periods from November 2000 to June 2003, the portfolio value of $100 would drop to $76. Conversely, if one acted on these signals in November 2000 by simply buying an inverse ETF such as the ProShares Short S&P 500 (SH) (which didn’t exist then, but does now), then exited in June 2003 SH, a portfolio value of $100 would rise to $124.

This will create 63% more wealth than a simple “buy and hold”, and it’s well worth the time and effort to do both! Additionally, additional profits can be made during bear markets using other simple technical indicators we follow that help determine when a bear market rally begins and ends.

2008-2009 Great Depression

The chart below for SPY shows the Great Recession bear market of 2008-2009. Likewise, the price of SPY is shown in orange, 250-dma in red, 60-dma in green, and 20-dma in blue.

Spy in 2008-2009

Spy in 2008-2009 (StockCharts.com)

From January 2008, when SPY’s price and both the 20-day and 60-day moving averages fell below the 250-day moving average, to the March 2009 bottom, SPY fell about 49%. By August 2009, when SPY’s price and both the 20-day and 60-day moving averages rose above the 250-day moving average, SPY had fallen about 23%.

If one held SPY during these signal periods from January 2008 to August 2009, the portfolio value of $100 would drop to $77. Conversely, if one acted on these signals by buying an inverse ETF like the ProShares Short S&P 500 (SH) in January 2008 (which did exist at the time) and then exiting the SH in August 2009, a portfolio value of $100 might would rise to $123. This would create 60% more wealth than buy and hold – not bad for a few trades! Once again, additional profits can be made during that time by using other simple technical indicators that we follow.

Implications for investors

With the proper understanding and use of technical indicators, you can make substantial profits in a bull market. Lesser known is that you can also make decent profits during bear markets instead of taking huge losses.

While these simple rules won’t help you pick the exact top or bottom of a bull or bear market, they won’t help either. However, you can create massive wealth by understanding these rules and acting on them, leading to high returns over time.

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