The Absurdity of 20% Bull/Bear Market Definition

Includes: DIA, QQQ, SPY
by: Thomas J. Feeney

This is hardly about a critical investment issue, just one of my market-related pet peeves.

In recent years, readers of either the financial press or wider circulation papers have regularly read that 20% is the threshold for identifying bull or bear markets. To their credit, some writers acknowledge 20% as merely an “unofficial” bull or bear market determinant, as if there were an official definition. That financial writers and commentators have taken to using the definition regularly shows, at the very least, a lack of thoughtfulness.

The absurdity of using a 20% definition should have been apparent from the market gyrations of late 2008 and early 2009. In the final six months of the market collapse from October 2007 to March 2009, the simplistic 20% measure identified two “bull markets” interspersed among three “bear markets.” After the 33% decline in September and October 2008, the market skyrocketed by 24% from Friday morning, October 10 to Tuesday morning, October 14. Voila! A “bull market” in two market days. Unfortunately, that dramatic spurt didn’t last, and we suffered another 24% “bear market” over the next five weeks. But not to worry, another 22% “bull market” to the rescue in the next month and a half before the final “bear market” into the March bottom. Such a definition of bull or bear markets can make sense only to a statistician.

Perhaps the most obvious refutation of the purely quantitative definition comes from the experience of the greatest stock market collapse in U.S. history. The U.S. stock market plummeted by 89% in less than three years from 1929 through mid-1932. It would be difficult to imagine a bull market mixed into such carnage.

After the initial 48% crash in late 1929, the market bounced by a similar 48% in the five months from November 1929 to April 1930. One could argue that this rally constituted a bull market. I would prefer to categorize it as a substantial rally in a much longer bear market. What is far less open to question, however, is the designation applied to four subsequent rallies, ranging from 20% to 35%, in the 15 months from December 1930 to March 1932. The claim that the market experienced four separate bull markets in just a year and a quarter during the greatest market decline in this country’s history simply makes no sense.

There is no official definition of bull or bear markets. Logic demands, however, that it include some time factor at the very least.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.