Why Does -20% = Bear Market?

Battered by Oil, Dow Touches Bear Territory (New York Times)
Dow Hits Bear-Market Territory (Wall Street Journal)
Stocks Near Bear Market Territory (U.S. News & World Report)
US stocks post sharp weekly losses; bear market nears (MarketWatch)
This Bear Has Sharp Claws (Barron’s)

Market ends lower, Dow on cusp of bear market (Reuters) 
Stocks Tumble Toward Bear Market On Rising Economic Concerns (Washington Post)


The latest commentary I seem to be having a hard time with is this weird obsession with minus 20%. What makes this number, as opposed to 15%, 25%, or even 36.54% special?

Consider this somewhat bizarre commentary:

Stocks fell on Friday, pushing the Dow to the brink of a bear market, hounded by concerns that record oil prices and the seemingly endless credit crisis will further damage the economy. Friday’s decline built on Thursday’s rout in which the Dow fell about 360 points, and rounded out its worst week since February 10.

While the blue-chip Dow average briefly dipped into bear market territory, it managed to close above that level, thus narrowly avoiding the official onset of a bear market, or a 20 percent drop from its all-time high.  (emphasis added)



What is the magic about 20%?

What makes this the "official" onset of a bear market? There isn’t any NBER-like group that declares an "official" bear market.

Best as I can figure, the 20% number is a not-quite-a-random number — more than a 10% correction, less than a full blown crash (which for all we know, could be "offically" 30%).

I have no idea who first started bandying about these nice round base ten numbers — but for whatever reason, they seem to have stuck in the public and the press’ imaginations. (Anyone have a better idea where these two figures came from?)

Forget the rather squishy terminology, and consider the following economic, fundamental and technical questions:

• Is the Economy expanding or contracting? Have recent data points been improving or worsening?

• Are corporate earnings getting stronger or weaker? Where are we in the earnings cycle?

• Are stock prices generally rising or falling?

• Are market advances narrow or broad? Is the volume expanding on up days, or on down days?

• Is investor Psychology greedy or fearful?

Rather than focus on terminology, investors should be considering their risk management strategies, what they are doing to preserve capital, and how they are psychologically prepared to deal with what could be an extended downturn.

That matters a whole lot more than whether something is called a bull or bear market…


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  1. Doug commented on Jun 29

    Yes, in a sane world, the fundamentals would be more important than the sound bite. In a more sustainable world, this would be the case. Yet, in the world as it exists today and actually operates, this isn’t so clearly or confidently answered.

    Media, we know, emphasize ‘the narrative’. “The Narrative”, in turn, tends to demand reduction to sound bites — and, also, tends to play out the story to its conclusion. In that sense, the ‘narratives’ preferred by media have a kind of ‘scoop’ quality to them — the hope that those crafting the narrative have ‘scooped’ the future by telling us what the future will bring.

    “Bear” market as sound bite fulfills all this. It tells us in short hand what the narrative is — and how this narrative will play out. It is counterpoised, we know, against the competing narrative of “the worst is behind us” or “this will be a mild correction” and so forth.

    And, so, we forfeit an orientation toward problem-solving in favor of talking heads/screaming heads battling over sound bites and illusions.

  2. cinefoz commented on Jun 29

    Nope. It’s just the lizard brain attempting to feel in control by imagining patterns when all that exist are random events that influence cause and effect relationships. It’s the lazy person’s way to justify being lazy. This is one reason why some compare technical analysis to astrology … “our fate is not ours, but controlled the stars … and the technical indicators”.

    Personally, I like some technical indicators in the way that someone might use statistics for hypothesis testing, providing I can support my observation with solid facts that make sense.

  3. JP commented on Jun 29

    Best as I can figure, the 20% number is a not-quite-a-random number

    No more or less random than the technical analysis crap that people spew. Its valid because everyone says its valid.

    (The fibonacci people are especially amusing, though I’m surprised they didn’t settle on Galois primes in order to sound more authoritative.)

  4. JP commented on Jun 29

    [Hmmmmm. It seems that cinefoz has also unplugged from the matrix.]

  5. cinefoz commented on Jun 29

    Dammit .. I meant to type

    This is one reason why some compare technical analysis to astrology … “our fate is not ours, but controlled BY the stars … and the technical indicators”.

  6. BG commented on Jun 29

    My post is a little bit off-topic here. (I’ll be brief.)

    If Trichet RAISES interest rates next Thursday even by 25bps that isn’t going to be good for BB. TALK of a stronger US Dollar will no longer be adequate for our markets. Whew!!

    I just get this sense that Europe in concert with the Middle East is busting Bush’s balls in an attempt (quite effectively I might add) to force out as many Republicans as possible before the election.

    Between trashing the US Dollar (which we admittedly are largely responsible for), supporting the peak-oil view (in being stingy about pumping more oil) and the ECB having NEVER lowered interest rates (even once) since last Fall makes me think it is a concerted effort to force a massive change in the political landscape in the US come November. It is also fair to just say, they haven’t helped the US when they could have.

    IF parties outside the US continue to counteract, offset or thwart what BB and others do here in an attempt to stabilize our financial markets, it could REALLY get UGLY leading up to the election.

    If they raise on Thursday, then (that tells me) nobody is playing ball with the US and are just simply piling on.

  7. Chris commented on Jun 29

    The 20% number is arbitrary….as is 2 negative quarters of GDP.

    To begin with, you can’t have a recession unless you first have a credit induced boom. A recession is nothing more than the liquidation of all the malinvestments that occured during the boom.

    The crisis (contrary to popular opinion) is the credit-fueled boom, not the recession…The recession is a return to reality.

    So the question is not 20%, or 2 quarters of negative GDP….The question is: “Are the malinvestments created during the boom being liquidated?”

  8. Steve Barry commented on Jun 29

    Somebody probably looked at past periods where the market was flat for 20 year periods…they are pretty easy to spot on a chart (even the Elliot Wave guys do it) and they said well they seem to fall about 20%. But it seems to me that there should be no definitive number that needs to be hit…it’s like what makes porn offensive?…can’t define it, but know it when I see it.

  9. cinefoz commented on Jun 29

    Could this be the Barry Ritholtz Contrary Indicator?

    In January, the end of the world was being forecast here, much more strenuously than in previous weeks. S&P 1100ish was in the cards for later this year. Bear’s collapse was somewhat unexpected, but supported the theory. Then, the market went up up and away. It would have kept going if the oil thieves didn’t ramp up their ponzi scheme. This may be shut down soon. Now, due to another random event (oil), the market is falling and the pessimists are piling on.

    Cha Ching!


    BR: Here in January, we discussed why you can trade from the long side for a 8 to 12% pop.

    I do not recall an “End of the World” forecast, but, rather than incorrectly put words in my mouth, perhaps you can point us to a link ?

  10. Steve Barry commented on Jun 29

    Random points that few are discussing…

    I have metioned my put/call charts this week showing we are nowhere near an oversold bounce. Anyone ever look at the Commitment of Traders? It shows futures and options traders only very slightly bearish. Not calling for a bounce at all.

    If a short covering rally were coming, you would see much higher Short Interest on Nasdaq. Click through the link and I have put all the top names in the dropdown for you. Short interest is very low. perhaps instead of shorting, evrybody bought QID? But then we would see a massive rise in puts, as that’s how QID moves inverse to QQQQ. So I think the short interest is way too low.

    Bush claims to have created 5 million jobs…I read that 40% were real estate (ie BUBBLE) related. Everyone of those jobs is not needed in a normal housing market. Plus wall street alone probably created 100K related jobs or so. Therefore no bottom until around 3 million jobs are lost if you include Detroit going BK.

  11. Philippe commented on Jun 29

    There are so many given principles: Implicit volatility in option maths, two consecutive negative growth in GDP to make a recession , Taylor rule (no longer applied or referred to), equities crash a market being down by 20 or 25 pct ?
    Why argue about 20/25 PCT equities downfall being a bear market definition when getting trapped in the semantic is already agreeing on the assumptions.

  12. B.B. commented on Jun 29

    I agree with JP. Cinefoz coming back to life can only mean the market is ready to bounce up.

    I am just glad I pulled my 401K out last Sept (posted here then, for you non-believers).

    I have several Fast Money, Kudlow, Cramer shows recorded from the last year. Listening to Kneale, Luskin, Ferral, Bowyer is great for comedy hour. And still today all of those perma bulls are claiming “no problems”. Joe Bat, Garry Schilling and our own Barry had to take some heat on these shows but now time has told the tale. Congrats BR!

    I am a daytrader, Cinefoz does actually have one thing correct. Most T/A is just numbers. Took me a long time to realize its all about Price, Price and the reaction to Price, thats all that matters. And Price Action as of the last 8 months says bear market. I could care less about -20%.

    O/T, Price action last week was strange, it seems that everyone is waiting for capitulation so no one wants to buy yet, however no one wants to sell into the ‘hole’.

    Good luck all and remember the tradeable bottom that should be coming soon is a trade only and those Bear market rallies should be sold into. IMO

  13. Jim Haygood commented on Jun 29

    Twenty percent is arbitrary, but it more or less corresponds with the typical market decline in a typical recession. [BR: actually, its more like 30%]

    At 10%, plenty of market dips are printed which have nothing to do with recession. 30% ends up being too deep: plenty of recession-induced slides (e.g., 1970, 1990) never go that far.

    So 20% ends up being a good rule of thumb. Not every 20% market dip produces a recession; nor does every recession produce a 20% market dip (e.g., 1953). But at the 20% threshold, the number of ‘errors’ in each direction are roughly equal.

  14. Steve Barry commented on Jun 29

    All T/A is prone to failure, but I have found a well placed support/resistance line is always a good guide. One under appreciated TA is VOLUME. Remember I kept harping on a daily basis that QQQQ volume for like 50 straight days during rally from March lows could not reach its 100 day average? It caused me to fully discount the rally and stay short. It was poven correct, as amost everyday since June 12, volume has broke its 100 day and QQQQ is down almost 10%. It is rock solid proof the QQQQ is rotten to the core…and trades at a hefty 35 times earnings and 1.9 times sales in a crisis environment. It should actually trade at maybe 17 times earnings and 1 times sales if a depression is averted.

  15. B.B. commented on Jun 29


    Yes, couldn’t agree more. I do use simple S/R and trendlines when I daytrade and constantly watch volume. Your january call can still work out, we have 6 more months. Enjoy your posts, good work.

  16. Winston Munn commented on Jun 29

    I know what you’re thinking. “Is the market down 20% or is it only 19?” Well, to tell you the truth, in all this excitement I kind of lost track myself. But being as this is your life’s savings, without which you wouldn’t have a dime in the world, and might as well blow your head clean off, you’ve got to ask yourself one question: Do I feel lucky? Well, do ya, punk?

  17. Steve Barry commented on Jun 29


    Thanks..the whole basis for my Jan call was recession cannot be averted and S&P should trade for at most one times sales in a recession..even that is very generous.

  18. John commented on Jun 29

    When I get to be dictator all numbers tossed to the public must be prime numbers.

    No more numbers with factors of ten (or five). Thus, 23% decline, not 20%, means fear of bear market.

    Same for all estimates.

    By order of the Dictator.

  19. Bodz commented on Jun 29

    “I have no idea who first started bandying about these nice round base ten numbers — but for whatever reason, they seem to have stuck in the public and the press’ imaginations. (Anyone have a better idea where these two figures came from?)”

    Actually we use them because we have ten digits. Seriously. If we had nine digits, a bear market would probably mean an 18% decline.


    BR: Yes, that’s what I meant by Base Ten numbers . . .

  20. Pool Shark commented on Jun 29


    So what are you doing with your ‘Fistful of Dollars?’

    “I gotts ta know.”

  21. teraflop commented on Jun 29

    Great points, Barry. Were we to not have opposable thumbs, pundtry would likely proclaim that -16% would be the threshold before a bear market could be declared.

    The same mentality is seen in the focus on indices and other aggregate measures as in the chase for low apparent/hedged risk for high yield. Intellectual laziness drives this myopic focus while the alternative requires that the effect of econometrics be: a) understood; and b) explained.

    It’s far too much to expect.

    I like to imagine what would have happened had the billions sunk into real estate via ABS/MBS instead had been invested in actual ||shudder|| domestic businesses. We could have avoided some of this poorly real-world-tested structural & counterparty risk.

  22. Zach commented on Jun 29

    I agree with you in that -20% is not a particularly useful measure, but the reason it is used goes back to statistics. If you use a particular number to define a bear market, then you can run stats on how long they last, what the average decline is, and what investors can expect.

    But that argument is a bit ironic when considering that each of the stories that I read this week begin with some statement like “all bear markets are different and cannot easily be classified.” So what is the point in running all those statistics if they really don’t tell us anything. As with any other statistical measure, the concept of “garbage in, garbage out” applies.

    Thanks for voicing your concerns.

  23. Winston Munn commented on Jun 29

    Pool Shark wrote, “So what are you doing with your ‘Fistful of Dollars?”

    Trying to get it to earn “A Few Dollars More” but the portfolio is going from good to bad to ugly.

  24. trade commented on Jun 29

    IMHO, a bear market is when the 200 DMA is in a downtrend with the 50 DMA below it.

  25. odograph commented on Jun 29

    Humans are social creatures, and part of behavioral finance must surely be the numbers we decide (as a group) are important.

    Why were people looking for specific gasoline prices $3.50, $4.00, to form a tipping point?

    I think it’s the same reason that 20% can be a bear market … some numbers feel different, and some numbers help build a consensus belief.

  26. Steve Barry commented on Jun 29

    Actually, if we had nine fingers, it would still be a called a 20% decline…but counting would be 1,2,3,4,5,6,7,8,10, etc…you can’t get away from round numbers.

  27. Pool Shark commented on Jun 29


    Well played sir.

    [golf clap]

  28. bluestatedon commented on Jun 29

    Speaking of recent data points improving or worsening, courtesy of Bloomberg:

    “Payrolls Probably Fell, Factories Slowed: U.S. Economy Preview
    By Bob Willis

    June 29 (Bloomberg) — U.S. employers probably cut jobs in June for a sixth consecutive month, while manufacturing contracted at a faster pace, signaling the expansion is still at risk, economists said before reports this week.

    Payrolls shrank by 60,000 workers, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department’s report on July 3. The unemployment rate may have fallen after jumping last month by the most in two decades.

    Mounting job losses, record gasoline prices and tumbling home values have crushed consumer confidence, raising concern that spending will retrench once the lift from the tax rebates fades. Businesses are also purchasing less equipment as fuel costs soar, prompting factories to scale back.

    “Job growth is going to be non-existent for the next six months,” Maria Fiorini Ramirez, president of MFR Inc. in New York, said in an interview with Bloomberg Television. “The economy is sort of staggering along.”

    The projected drop in payrolls would follow a decline of 49,000 in May that brought the number of jobs lost so far this year to 324,000. Factory payrolls probably shrank by 30,000, economists forecast, after a 26,000 decline the prior month.

    Factory Slowdown
    Manufacturing, which accounts for about 12 percent of the economy, probably shrank for a fifth month in June, the Institute for Supply Management’s factory index may show on July 1. The gauge probably fell to 48.6 from 49.6 the prior month, according to economists polled. A reading less than 50 signals contraction.”

    I have to laugh at the concern over the “expansion” being at risk. It’s the expansion that wasn’t.

  29. Bodz commented on Jun 29

    The only reason that we use the decimal system, based on the number 10, and not some other system, is because we have 10 digits. No other reason.
    Why is a century 100 years and not, say, 92?
    Why is a million multiples of ten instead of , say 6?

  30. Mich(^IXIC1881) commented on Jun 29

    So what? 20% is a good round number, that has a wide usage (pareto principle). Once a 20% think happens, it tells people something. If stocks fall 20% from their peak, you know it is not random walk anymore, 1 to 5% is observed as randomness, 10% healthy correction, as you go farther the chances of a major trend change gets stronger. After 20% most everybody shuts up about “nah, it is just market correction”.. If you want to believe the markets haven’t changed direction and we will be back at October heights before we know it, go ahead act on your wisdom.

    For me, even 11% was good enough to confirm the market has decided finally to obey the law of nature.

  31. cinefoz commented on Jun 29

    BR asked

    I do not recall an “End of the World” forecast, but, rather than incorrectly put words in my mouth, perhaps you can point us to a link ?

    reply: Pardon the exaggeration of emphasis. Literally, you did not make such a forecast. However, the tone of those posts at that time was excessively pessimistic. Your S&P forecast for the eventual bottom was in the 1100 range. You stated that we should have a complete purge (probably not using that exact word) and either stated or strongly implied that the Fed had no business providing bailouts. The need for pain was a common suggestion. Hoover used a phrase that had something to do with the need to remove the rotten elements, and, otherwise do nothing else … I can’t recall the exact wording. Your tone reminded me of him at that time in some ways. If oil had not spiked, the market would not be in this range and the other favorite ‘problems’ would be on their way to recovery, although still weak. Financials will suck for a while but financials do not comprise much of the real world economy. Maybe in NY, but not many other places.


    BR: Here’s the link for all January 2008 posts.

    Get specific:

  32. Jody Wilson commented on Jun 29

    The goalpost of -20% for a bear market has some historical logic to it.

    Just take a look at the Dow or S&P from January 2004 to October 2007. There were six “dips” of between 5 and 10% during that bull run, and nobody would ever consider calling those crashes or bear markets. Partly that’s because these kinds of dips tend to occur in all bull markets, and partly it’s because there typically aren’t any major economic concerns during such bull market dips. So we’ve given these occasions the relatively gentle name “correction.” That’s certainly a lower limit then for a bear or a crash.

    Now, to draw a hard line at 20% instead of 15% or 21% for an official bear market is obviously arbitrary, but that doesn’t make it completely useless or illogical. Why is 73 mph a tropical storm while 74 mph is a hurricane? There are physical differences in wind patterns (eye vs. no eye) and damage done that tend to be delineated by that threshold, albeit not perfectly.

    Similarly, most (but not all) market drops of 20% or more have been accompanied by real economic issues. Sure, there may have been only an 18% drop during a past recession, and the 35% drop in 1987 was not accompanied by a depression. But just because a definition isn’t perfect doesn’t make it useless.

  33. Mich(^IXIC1881) commented on Jun 29

    Cinefoz and others mentioned this “if it wasn’t for oil” argument. If it was not for oil, it would be some other excuse, when markets need to go down, they will go down.

    Further, I can easily argue that oil, ag, commodities are going up because everything else is coming down. If the oil wasn’t going up, or was coming down, that would require fed rates going up (and in turn markets going down), dollar going up (and in turn markets going down).

  34. Andy Tabbo commented on Jun 29

    Great post Barry. Really, who gives a crap if your portfolio is down 19% or 20%. And who really gives a crap about being down 20% when the purchasing power of the dollar is declining at >5% rate? All anyone has to do is observe a chart to realize that this current decline looks A LOT different than any another decline we’ve had since 2003. In fact, it looks similar to the beginning stages of the 2000-2002 pukefest.

    If you want to get a really sick feeling, chart the SP500 v. WTI for the last few decades. It has been in an unabated slide since 2000 and we are now at 1990 Persian Gulf War relationships. And if anyone really wants some perspective, chart the SP500 denominated in euros. We are approaching the 2002 LOWS. The “bull market” of 2002-2007 has already been erased in Euro terms.

    I know, I know, you don’t buy things in Euros or Oil, but it’s a sobering sign of the complete erosion of American’s purchasing power relative to the rest of the world.

    – AT

  35. mobiaxis commented on Jun 29

    “if it wasn’t for oil”

    IF only we had some cheese, we could have ham & cheese…

    …IF we had some ham.

  36. Kirk commented on Jun 29

    Huge fan.

    Can I ask a question? Why don’t WE just look at the market thru a clear and unemotional metric. EARNINGS.

    Using the S&P 500 we find the following:

    Trailing 12 month operating earnings are currently $76.77 per share. PLEASE NOTE the peak earnings quarter for the S&P 500 was Q2 2007. Thus when that peak earnings quarter is not included in the trailing twelve month earnings the trailing twelve months earnings will TUMBLE!

    Looking FORWARD we can see that IF the next two quarters are (OPTIMISTICALLY) $17.50 per share then forward 12 month earnings are currently $66.84. KEEP IN MIND earnings will most likely be dropping or FLAT over the next two quarters. So $66 per share forward earnings for the S&P 500 is very OPTIMISTIC!

    NOW…apply a REASONABLE multiple on $66.84 per share. Say 16.

    16 x $66.84 = 1069.

    1069 on the S&P 500???!!! WHY NOT?!

    You can talk stat after stat after stat…

    But the market will always follow ONE thing over an extended period of time – EARNINGS!

    World Affairs will also play a vital role in the coming 6 months (election, Iran, Goldman Sachs Blowup).

    Have fun!!!

    By the way…Please note the attached S&P 500 earnings link below. The ESTIMATES of $22.23 and $24.53 are borderline criminal. Keep in mind that on April 9th 2008 (days before Q1 earnings season began the estimates were for $21 per share for Q1…ACTUAL EARNINGS TURNED OUT TO BE $16.62!)

  37. larster commented on Jun 29

    I do not know what the concern is, as I just got around to reading Moor’s interview with Phil Gramm in yesterday’s WSJ. McCain has a plan to balance the budget in four years. There will be less governance using the Texas model which created 1,6 millikon jobs (he glected to mention chep Mexican labor or $140 oil), corp tax rates will decline and everyone will get a tax credit for something. This is all predicated on “winning” in Iraq and Afghanistan.

    Almost makes one giddy w/anticipation.

  38. ardano commented on Jun 29

    Dear Fellow Readers:

    Since we’re talking round numbers…let’s call the top of the market at 1500 on the SPX, a level hit in early 2000. This is 2008 and the SPX is just now getting back to the 1500 neighborhood. We’re not talking the narrow Dow here; and lets not even discuss the nazdog. Do any TBP readers see a huge move up from here? The SPX has been dead money since 2000. As for all the talk about a bear market or not, how can anyone argue we are not simply rolling our investment bubbles…from dot.com to housing/credit and now a cheap dollar inflation driven sector(s) play. This is not a recipe for a strong/broad market advance. The broad market has been weak since the dot.com era. Technology, globalization, new investment vehicles, etc. have changed this market and we cannot roll the clock back. The bigger issue is macro and based on economics, which I hate. This is a lousy time in our demographic cycle to have below trend growth, let alone a bear market. Cleaning out the system would require the kind of drop that people like Royal Bank of Scotland and Louise Yamada are concerned about. Sorry to say that I think we’ve been in a bear market since 2000 since most investors have portfolios that reflect the dow, spx, oex, qqqq, with smaller allocations to small, mid cap and international stocks.

  39. cinefoz commented on Jun 29

    BR challenged:

    Here’s the link for all January 2008 posts.

    Get specific:


    Stock Trader’s Alamanac: Uh-Oh
    Tuesday, January 08, 2008 | 03:48 PM

    Open Thread: PPT to the Rescue?
    Tuesday, January 08, 2008 | 07:30 PM

    Meanwhile on Wall Street . . .
    Friday, January 11, 2008 | 02:30 PM

    Baltic Dry Shipping Index
    Monday, January 14, 2008 | 11:00 AM
    (my personal favorite)

    Look out Below!
    Tuesday, January 15, 2008 | 03:12 PM

    2008 vs 1992
    Wednesday, January 16, 2008 | 01:50 PM

    Housing Starts Plunge 14%
    Thursday, January 17, 2008 | 01:00 PM
    (recurring theme)

    Open Thread: Beginning or the End?
    Thursday, January 17, 2008 | 06:00 PM
    (nice you asked)

    Arthur Laffer: US is in Recession Now
    Friday, January 18, 2008 | 11:02 AM

    Retail Heading Towards Biggest Wreck in 17 Years
    Friday, January 18, 2008 | 01:30 PM

    USA Equity Futures: Look Out Below!
    Monday, January 21, 2008 | 05:26 PM

    Time to Panic?
    Tuesday, January 22, 2008 | 04:30 AM

    Futures off a tad . . .
    Tuesday, January 22, 2008 | 05:49 AM

    NYSE Dow Circuit Breaker
    Tuesday, January 22, 2008 | 08:45 AM

    “A Whiff of Panic . . .”
    Tuesday, January 22, 2008 | 10:01 AM

    “Classic Bear Signal”
    Wednesday, January 23, 2008 | 04:00 AM

    Is the Fed a Paper Tiger?
    Wednesday, January 23, 2008 | 07:19 AM

    3 Prior Market Crashes
    Wednesday, January 23, 2008 | 12:45 PM

    Fed’s Folly: Fooled by Flawed Futures?
    Thursday, January 24, 2008 | 10:15 AM

    Read it here first: Fed Responding to Stocks?
    Friday, January 25, 2008 | 07:00 AM

    Developing Economies Face Reckoning
    Friday, January 25, 2008 | 11:55 AM
    in Markets

    I only selected a few and had to stop here because I kept accidentally closing the window … I was reading in one tab and pasting in the other. This is my 2nd try.


    BR: Your list does not contain a single “End of the World.”

    It does contain a number of analyses that were timely and accurate.

    I still don’t get what you are trying to say here . . .

  40. Bedivere commented on Jun 29

    I’m in the camp that believes we need look no farther than a count of our digits to grasp the answer to this conundrum. However, I’m intrigued by Teraflop’s statement:

    “Great points, Barry. Were we to not have opposable thumbs, pundtry would likely proclaim that -16% would be the threshold before a bear market could be declared.”

    Shouldn’t that be -18%, or do you really have opposable thumbs on your feet? Inquiring minds want to know. Please post a picture;)

  41. dukeb commented on Jun 29

    Winston Munn | Jun 29, 2008 9:45:08 AM:

    That spin was pretty damn funny! (And yet oddly grounding….go figure.)

  42. Estragon commented on Jun 29

    Steve Barry – “you can’t get away from round numbers.”

    What if we had 32 fingers ;-)

    Bodz – “The only reason that we use the decimal system, based on the number 10, and not some other system, is because we have 10 digits. No other reason.”

    So is that why there are 3 feet in a yard? Sounds vaguely gruesome.

    Systems of numbering and measurement, though likely based on some human physical trait, often increment in non-decimal quantities. Volume, for example, starts with a mouthful (about 1/2 oz) and increments in powers of 2 (a jibber being 2, or about 1 oz, a jackpot being 2 jiggers, a gill being 2 jacks, a cup being 2 gills, and so on).

    A possible advantage to such a system is the ease of subdivision. Any smaller quantity can be easily created by halving and halving again.

    What I really wanna know though, isn’t why 20% is a magic number, but why the Dow is the referenced index. The only reason I can come up with is the Dow @ -20% is what publishers think will sell newspapers this weekend.

  43. mark mchugh commented on Jun 29

    Apparently none of you geniusii have ever heard of GAPP (Generally Accepted Propaganda Principles). It’s based on the scientificul principle that before you get somewhere, you have to go halfway there, then halfway from that point…….

    So, of course we’re not there yet. Geez!

  44. Bill Markle commented on Jun 29

    I can’t comment on the usefulness of the “20% down = bear market” concept for stocks, but many years ago, when real estate markets were a little more sane, required down payments for individual homebuyers or equity shares for commercial projects were often in the 20% to 25% range. That meant that prices of assets could fall by 20%, and the banks would still be able to cover their investment. In other words, if the bank cannot cover its investment, that must really be a difficult = bear market.

  45. Troy commented on Jun 29

    Financials will suck for a while but financials do not comprise much of the real world economy

    For not being much of the economy they sure take a big slice of the profits . . . a third of the S&P 500’s earnings IIRC.

  46. mw commented on Jun 29

    How about two down quarters in the market? Or a lower swing high and lower swing low on the **monthly** chart? Take the Dow for example:

    Long banks May 17. Flat in April. Short Banks in Canada and US on May 2 and doubled down May 5. Short Dow May 19 and again May 20 on failed test of top setup. Easy as can be. A little more down and I’ll have 2000 Dow points in the, er, bank.

    Could it go lower, much lower? Of course it can. Will I, a mere technical analyst, be able exit these already extremely profitable short positions if the market finds a bottom before long (highly unlikely)? Sure.

    Its been my experience that so-called long term investors are generally unable to see the change in trend – whether it is price action in a stock or index, or in the economy as a whole – because of biases or intellectual laziness on *their* part.

    A long/short trading analyst, of any persuasion–technical, fundamental, others or all of the above–has to have plenty of mental dexterity and an openness to being proved wrong.

    Its not difficult, at all, to determine if a market is trending up or down or not at all. One not need subscribe to the views of “forecasters” – be it A. J. Cohen or Prechter – to profit from a simple knowledge of trends and detection of where they bend.

    But if you want to profit big time you need to be open to the unusual and keenly aware of change. Most long-only investors, retail or professional, appear to fail both requirements.

  47. MM commented on Jun 29


    Paulson is now in Russia. Why? More instant oil supply. The price of Crude will come down. I can see the market will goes up right away. Not a surprise for a 300+ points rally led by the Nasdaq. So, please be bullish!

    And Bear Market. What Bear Market? Cheers

  48. tomstarke commented on Jun 29

    10% and 20% are chatter points. They help the press, investors, and the public communicate that something’s going on. 20% is particularly important; many investors believe the market will bottom when the outlook is darkest and six months before all the positive indicators you mention have become clear. As the markets passes 20% and heads for 40%, the chatter will change to a comparison with the last recession, the 1970s and the early 1930s. Trying to catch the falling knife is probably one of the common investing errors.

  49. m3 commented on Jun 29

    -10% = a correction

    -20% = a correction * 2 = bear market

    so i guess we need to ask why -10% is the magic number for a correction?

  50. ben commented on Jun 29

    Not sure if this is the place to ask but it is as good as anywhere:

    Any stats you can find when we go through crap 10 year periods like this and then what the market does afterward? My understanding is that this has been one of the worst 10 year periods for stocks ever, I thought this was in a Barron’s a few months back.

    It would be ineresting to start to see some calls on what happens on the other side of all this, or maybe after sPX 1100 and DOW 10k. I guess it’s probably way too early.

    here’s one longer term call from a pretty smart guy named warren b. I took it out of the 07 shareholder letter.

    During the
    20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually. An investor who owned the Dow throughout the century would also have received generous dividends for much of the period, but only about 2% or so in the final years.

    Think now about this century. For investors to merely match that 5.3% market-value gain, the Dow would need to close at about 2,000,000 on December 31, 2099. We are now eight years into this century, and we have racked up less than 2,000 of the 1,988,000 Dow points the market needed to travel in this hundred years to equal the 5.3% of the last.

    It’s amusing that commentators regularly hyperventilate at the prospect of the Dow crossing an even number of thousands, such as 14,000 or 15,000. If they keep reacting that way, a 5.3% annual gain for the century will mean they experience at least 1,986 seizures during the next 92 years. While anything is possible, does anyone really believe this is the most likely outcome?

    He then says:

    I should mention that people who expect to earn 10% annually from equities during this century –envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly
    forecasting a level of about 24,000,000 on the Dow by 2100.

    pretty crazy when you think about the numbers, too bad I won’t be here in 2100 to see how it all works out. Then again if the mayan calendar is correct no one will.

    I also think this could create an argument for investment more of one’s assets overseas. After all, prior to the boom market since the early 80’s most stock market wealth was from dividends, now most of the higher yields can be found on foreign assets.


  51. Chester White commented on Jun 29

    For that matter, why the fetish seen everywhere, including on this site, for the “200-day moving average?”

    Why not 196 days? Or 214? Or 235.456?

    It’s like a religious obsession, this 200 days. Utterly, absolutely meaningless.

    The next time someone quotes one of these round numbers, ask him where it came from.

  52. michael schumacher commented on Jun 29

    The market would be where without all the Fed auctions???

    We were in a bear market last year however when you throw over $1.7 trillion( frankly I stopped counting after that) in-largely printed money via the BOJ, Fed swaps, Treasury auctions and god knows what else- printed money in an effort to “stabilize” it’s a wonder we are still where we are at…..it’s precisely because of these blatant attempts at manipulation why it’s not under 10k at present.

    It should be……and we’ve only been dealing with write-downs since Wall St. refuses any attempt at actually booking losses.

    Wait until they have to write it off…….


  53. m3 commented on Jun 29


    there are roughly 200 trading days in one year.

    it’s the same as a 40 week moving average (5 days * 40 weeks)

  54. Chester White commented on Jun 29


    And what makes a 1-year history so special when it comes to making stock market predictions (other than the fact that we pay taxes yearly, a mighty slim justification)?

    It’s all totally artificial.

  55. Simon commented on Jun 29

    I like Brian Shannon of alphatrends definition of a bear market which is a declining 200 day moving average. That’s been with us for quite a while and just acted as solid resistance ahead of the most recent decline.

    He is a lovely man with a wonderful site. You won’t find a better place to start if you want to begin learning how the market works and how to invest. His link led me here last August.

    Much like Barry he is a dedicated market pedagog.

    It’s nearly my big picture anniversary may be I’ll check out Barry’s wish list.

  56. hr commented on Jun 29

    -10 and -20 declines are benchmarks because they are round numbers in the same way that Dow 13,000 or 12,000 or 11,000 are. Remember the parties thrown when the Dow was hitting those millenial markers on the way UP? How about 0 degrees Fahrenheit or 100 degrees F. Isn’t 5 degrees cold enough? Only when it hits zero do the mind’s gears shift. Zero Degrees, now its cold! Wait until the federal deficit hits $10 trillion! $9.9 trillion of debt is bad and almost *unnoticed*, but $10 trillion whoa nellie, now that’s newsworthy! Same thing. All of these are merely yardsticks for easier mental comprehension.

  57. Barry Ritholtz commented on Jun 29

    Pedagog ? Thats a new one one me!

    M3 — there are ~250 trading days per year (52 weeks X 5, minus holidays and what not)

  58. John, Fitness Austin commented on Jun 29

    20% is valid because everyone says its valid. It just a convention that most people accept.

  59. Rock commented on Jun 29

    20% is an easier number to defend than 21%. If you choose 21% or 19%, more people would ask why that number. Since no particular number is any more right than any other number, a round number it is. Plus a round number implies that it is “just a number” and not an exact number.

  60. BlackSwan2008 commented on Jun 30

    “Rather than focus on terminology, investors should be considering their risk management strategies, what they are doing to preserve capital, and how they are psychologically prepared to deal with what could be an extended downturn.”

    According to the BP understanding contrary indicators is a good start to risk management in bear markets…
    Contrary Indicators 2000 – 2003 Bear Market

    “Anyone who manages assets for a living can garner a tactical advantage by learning to properly identify and employ these Contrary Indicators: They can be used as timing signals as well as help determine an appropriate investment posture (i.e., aggressive or defensive); Even for the least technically minded, they have value as risk management tools.”

    The BP May 31st post –
    The Big Picture -Understanding Contrary Indicators

    Not trying to make friends here, just money, so I am sticking with the BP…

  61. Sing Expat commented on Jun 30

    There is not a crash! This is not a Bear market. You are forgetting to seasonally adjust the decline. And apply hedonics.

    You see, the Dow and S&P components are better than they were last year and the year before. Shareholders get more utils per share than previously. The seasonal adjustment is 5% and the hedonic adjustment is a whopping 17%.

    Therefore, the stock market is really at least 2% over its peak. Of course, using core inflation of two percent, it’s just at its peak.

    so, nothing to see. All is well. Move along, move along.

  62. cinefoz commented on Jun 30


    Oil and the ponzi plan controlling the price of it is the problem now. Financials, housing, insurance, and the like all control a lot of money and profits, but someone could still do extremely well in the stock market and in life in general without paying much attention to any of them. Loans might be a little more expensive and credit might only be available for good reasons as opposed to any reason, but what’s so bad about that? Fix oil and the other problems will fix themselves. Don’t fix the oil ponzi problem and it will be the beginning of the end of the world.

  63. Vince commented on Jun 30

    Now that we are in bear market territory a few observations might help. A bear market is a decline of 20% from the market highs. We are a tenth of one percent off that mark now, so let’s round off and call it an official bear market. Sam Stovall of S&P was quoted in the weekend WSJ that since 1945 the average bear market has been 14 months in length. A bear market is officially over when the averages recover 20% from whatever the low point proves to be. That implies, of course, the market is recovering for some time before the bear is officially dead. It has also taken on average 12 months from when the bottom is hit (which, of course, is only known well after the fact) for the lost ground to be regained.

    Since 1960, the bear market declines have averaged -31%, with -21% in the early 1990’s the most mild and -45% the worst in the 1970’s. At the bottom, there are usually no stocks on the 52 week new high list. Last Thursday when the Dow Jones Average fell over 300 points, there were 41 new 52 week highs. There were also 409 new 52 week lows.

  64. Brian commented on Jun 30


    As far as I know, the 20% figure comes from Charles H. Dow. According to Edwards & Magee’s Technical Analysis of Stock Trends (I’m looking at the 9th edition), as is widely known, Dow’s tenets were published in The Wall Street Journal in the late 1800s. The second and third tenets (as listed in Chapter 3 of E & M) state that, “the most important are Major or Primary Trends. These are the extensive up or down movements which usually last for a year or more and result in general appreciation or depreciation in value of more than 20%,” and, not surprisingly, to paraphrase, ‘an upward moving major or primary trend is called a Bull Market . . . and the downward moving major or primary trend is called a Bear Market’ (15). Voila! There is your source, unless Dow was using the terms of some previous guru.

    While Dow, as you know from your course with Acampora, is considered the father of technical analysis, not every technical analyst is a Dow Theorist. If the media mouths mean to be using orthodox Dow theory (and you can be sure they worry about their orthodoxy, right?), then they are leaving out the time factor (and I’m sure any of them will begin self-flagellation once they are made aware of thier misuse of the term according to Dow). But then, this last nine months in the markets (and in the shopping markets) may have some people feeling they’ve aged some. Or something like that. And I can at least imagine the markets going lower from here (or staying roughly at this level) over the course of the next three or four months to fulfill Dow’s rules. Crazier stuff has happened. Even among Dow Theorists, I don’t think all of them are worried about the label they put on the trend (whether it is a technical bear or bull, or if it’s just gonna go go down until it confirms it’s gonna go up), they are more concerned with the direction of the trend.

    Just as a reminder, according to E & M, Dow did not think of his theory as a forecasting device with which to predict the precise levels the indexes would reach. Rather, he thought of his theory as “a barometer of general business trends” (13). He was simply looking for a way to assess the direction of business trends as he felt his indexes reflected them, and didn’t think of his theory as a method for divining the precise level his indexes would reach before turning up or down again as if by the magic of incantation or astrology. He felt he knew that a turn was happening, or moreso had happened, when some of the others of his tenets were fulfilled. As E & M state, Dow Theory “is frequently criticized for being ‘too late'” (13). Of course its premise is the assesment of what has happened in order to assess what direction business will head next, so it will lag some since it requires confirmation of the stated tenets.

    I dunno if his 20% figure is a result of base ten, whether borrowed from some other guru or not, or if it is based on a general assessment of the history shown in his indexes. But if it is because of base ten, I don’t think he’s to blame fer that. But the 20% (over a year or more) move to constitute a bear or a bull is based on Dow’s tenets as far as I know.

    Contrary to the content of some other comments, I don’t think of Dow as a kooky astrologist, nor technical analysis as any kookier than fundamental analysis, as if none of the rest of us is interested in the very thing Dow or others were and are searching for. Dow was searching for a viable method to assess the direction of the business trends and a longuge in which to codify the market events that had passed and those that were to come. And judging from the application of his methods to the markets over the last years and century, I’d say his approach is still viable.

    Dow Theorists, unite!

  65. omodes commented on Jul 6

    if commentators, analysts, and economic advisors are comparing our times to that of the great depression then isnt it true to expect a correction on par with the great depression? There was something on order of a 70 to 80% correction from peak to trough.

    There will be times when the market recapitulates on the way down, but this happened even during the GD. One of the best times to invest was two years after the Dow peak. So to put things into proper context, we are almost a year into it now. I expect a market capitulation a week or so after the next big bank failure. This time there will be no heroes.

  66. Alex Douglas commented on Aug 5

    While it is true that a fall of 20% has come to be generally accepted as a marker of a bear market, this has NOTHING to do with technical analysis. There is nothing within TA theory or literature that states that a fall of 20% equates to a bear market.

    Alex Douglas

    Chief Technical Analyst – Fat Prophets
    Board Member – International Federation of Technical Analysts

  67. Alex Douglas commented on Aug 5

    Of course, there is that reference to 20% in Edwards & Magee (provided by Vince, above) – but it is hardly given as a hard and fast rule. There will frequently be numerous other indications that a bear has arrived long before you reach the magic 20% level.


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