There are many definitions of a “bear market: floating around, but the generally accepted theme is a 20% decline from the peak.
By that definition, the S&P 500 entered into bear market territory on Christmas eve.
That 20% drop came in pretty darn quick fashion too!
What we have to ask ourselves now: is this just a normal decline or the start of a larger, recessionary bear market.
There have been 21 bear markets since 1929 with the average of all declines sitting at 36%. This data thanks to Charlie Bilello of Pension Partners.
Clearly, a recession associated with a bear market results in much bigger declines than a bear market without a recession.
So, is the stock market predicting a recession? Or is this just a short, sharp decline?
Unfortunately, recessions can take a while to play our as Charlie says in his article:
“Looking at the data, the U.S. economy does not yet appear to be in a recession, but that fact is hardly an all-clear. After the March 2000 stock market peak, a recession did not begin until a year later: March 2001. No one can say for sure that in September 2019 (a year from the September 2018 S&P 500 peak) there won’t be a recession.”
What is clear is that markets are in a period of weakness and there will be plenty of counter trend rallies as we saw yesterday.
Shorting a bear market can be tricky, just take a look at some of the counter trend rallies from 2008!
However, if you’re looking to get short this market, 2600 on the S&P 500 would be a logical spot.
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.