Almost every talking head on the financial news is calling this recent correction a bear market. Technically speaking a bear market is when an index has fallen 20.0 percent from its peak. So yes, there are industry groups and sectors that are in bear markets right now. In fact, the Russell 2000 Index (NYSE:IWM) has declined 20.0 percent and is technically in a bear market. The S&P 500 Index (NYSE:SPY), NASDAQ and Dow Jones Industrial Average are not in a technical bear market yet despite the declines we have seen recently.
One thing traders should remember, bear markets will still have rallies and bounces. The same way bull markets have pullbacks and sell offs. Does anyone remember 2010? At that time, there was the flash crash on May 6, 2010 and a market that chopped lower into the end of August. In 2011, the major stock indexes plunged from May to October before rallying to new highs. There were two strong pullbacks in 2012 before another rally higher. Traders may recall the weak 2015 that we had and the tweezer double bottom in January and February 2016. Even during the 2008 bear market there were some monster rallies throughout the year.
The point here is that this is now a trader's market. Stocks are no longer climbing the wall of worry. Almost every news headline that is negative is being viewed as negative. Even positive news is now being viewed as negative and this is a change in character from what many are conditioned to over the past nine years. Either way, it is traders market. This is an environment where you must cut down the share size and take your shots at the long side when the technical levels are talking to you. This means that you must have the major stock indexes trading into a major support level and at the same time make sure the stock or equity you want to own must also be trading into a major support level too. Simply put, the bull market will no longer bail you out if you are wrong like it did in 2017. That year was basically straight up without any meaningful pullbacks. Those days are over for now. Everything is technical, traders and investors must now adapt to the new environment. Just remember, regardless of a bull or bear market nothing goes up or down in a straight line. There are always bounces and pullbacks, that is what makes a market, so just trade the technicals until another trend is established.
