How to Tell a Bear Market From a Bull Market Blip

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When stocks plunge just after all-time highs, like last week, be optimistic, not fearful.

If you’re fully invested, sit on your hands. Hard! For cash holders this action prescribes buying. Always stay cool. Fight any urge to sell. It’s all signaling more new highs ahead.

Bull markets don’t end this way. These sell-offs end fast, then bounce.

Last week — and the week before — were classic off-the-top correction-type gyrations. Purely psychological, corrections are scary but normal inside bull markets. These drops of at least 10% come and go without warning, for any or no reason. There might be more ahead. Maybe tomorrow. You can’t know.

In the 92-year history of the Standard & Poor’s 500, we’ve had 49 episodes that, top-to-bottom, fell less than 20% but fully 8% — like this recent downturn. They last a week, or 6 to 8 weeks. They leave as fast as they come. But what they don’t do is become big bear markets (which start very differently).

Last Monday’s 4.1% “cliff” felt huge, the worst day in years, but just the sixth worst inside the bull market. Folks forget.

Envision volatility in a bull market like whitewater during river rafting. The water goes where it’s going. You just need to stay onboard and in the center of the stream to make it through.

Real bear markets, however, are more like Niagara Falls, with long, bigger declines of 20% to 50%, and large, bad, real-world outcomes — like recessions. They’re trickier, too, so it’s worth comparing how bear and bull markets start.

Bears begin softly. The calm before the storm. No early announcement. No plummeting out the gate. Hidden in silence. In other words, bears begin where bulls end. Legendarily, “Bull markets die with a whimper not with a bang.”

Bear markets are born on euphoria, grow on grinding economics, mature on recession and die on panic. They begin temptress-like, luring folks too fearful to tread before — then navigating them far from shore where they can’t get back, before plunging them off Niagara-like cliffs. Late stage “greater fool” buyers feel that gentle pullback as their chance to “get in.” It feels good.

The first few months of a bear market are minor at most. Pain comes later. Typically, about two thirds of any bear’s percentage drop comes in the final 30% to 40% of its months — the waterfall.

Because bear markets start gently, you needn’t anticipate or see them fast. Slow down. Take several months pondering whether any pullback may be a real bear. My 1987 book, preceding that year’s epic crash, introduced my “three-month rule.” It prescribes never calling any market peak until three months past higher global prices. While, for sure, I haven’t seen all bear markets correctly, my three-month rule has always been true for global stocks, including famous years widely mythologized as sheer cliffs, like 1929 and 1987.

During corrections, media and market mavens invariably search for justifying causes. What made it happen? Why?

By the time they agree, it’s all over. Their supposed “cause” often sounds fantastical afterward. Could be any darned thing! But as it runs — parallel to panic — you can’t prove it’s imaginary. Humans can’t fully fathom that such swift, broad price swings lack fundamental causes. Believe it. It’s all emotion!

Diagnosing corrections isn’t about justifying a drop, or assessing value. It’s just a fast freak-out, with participants rushing for reasons. As I showed October 22nd, there is no relationship between valuations and stock price movement over even five-years periods. Thinking “value,” as so many do, throws you off on timing.

It’s a bull market. Where sentiment pushes prices next week, or next month, is impossible to know. But February isn’t how bear markets start.

For now, patient, diversified, owners of big, high-quality stocks should see happier times ahead in the bull market’s next up-leg.

Ken Fisher is the founder and executive chairman of Fisher Investments, author of 11 books, four of which were “New York Times” bestsellers, and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter @KennethLFisher