What is a bear market volatility?

Definition of Bear Market Volatility

Bear market volatility refers to a temporary increase in stock market prices that occurs during a bear market. It may also be referred to as sucker rally, bull trap, or dead cat bounce.

Key Takeaways

Bear market volatility occurs when prices rise during a bear market. It is also referred to as sucker rally, bull trap, or dead cat bounce, as this volatility can fool investors into buying stocks just before they drop again. It can be difficult to identify this type of volatility even after it has occurred and it can happen multiple times in a prolonged bear market. Day traders can profit by selling stocks on margin, but individual investors should stick to their investment strategy. Bear market volatility indicates that the downturn will continue and prices will become cheaper before a real recovery begins.

Definition and Examples of Bear Market Volatility

There are many labels that highlight the risk bear market volatility poses to investors who assume prices have bottomed out when the gains are only temporary before prices fall again. Bear market volatility may also be referred to as a “sucker rally” or a “bull trap” because long-term bullish investors who buy during bear market rallies are likely to experience a sudden drop in prices. Bear market volatility may also be called a “dead cat bounce,” based on the Wall Street saying that anything that drops enough will exhibit a temporary bounce when it hits the bottom.

The latest example of bear market volatility occurred in 2020. The S&P 500 index dropped more than 20% between February 20 and March 12, closing at 2,480.64 and officially entering a bear market. The next day, the index rose by 9%, but the investors who returned to buy were fooled when the index dropped to 2,237.40 after just 10 days, effectively negating the gains as the market continued to decline.

What Does Bear Market Volatility Mean for Individual Investors?

A bear market is defined as a period when stock prices fall by 20% or more for at least two months. During this time, prices may begin to rise again before dropping back down. This is bear market volatility, where the rise is followed by subsequent losses until the bear market reaches its bottom. Like any other market movement, bear market volatility can present an opportunity to make or lose money.

Long-term, diversified investors should ignore anything that appears to be the beginning of bear market volatility and stick to their proven investment strategies.

Taking a Short Position

Bear market volatility provides day traders with an opportunity to make money by selling stocks on margin, a complex strategy that may not be suitable for novice investors.

Try Dollar-Cost Averaging

Long-term investors who make regular contributions to their accounts – especially retirement accounts – should celebrate bear market volatility as it indicates that stock prices will decline for longer periods. Individuals who use a dollar-cost averaging approach can buy more shares at lower prices until the market hits its bottom. Over time, the average price of the stocks they own decreases.

Avoid Emotional Investing

Jumping on volatile stock prices simply because you fear missing the bottom of the market is a symptom of emotional investing that can guarantee losses. Investors with proven strategies and a diversified portfolio should ignore anything that appears to be the beginning of bear market volatility, stick to their long-term plans, and avoid losses.

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It Is Unlikely to Last Forever

Downturn market fluctuations indicate that the decline is going through its natural cycle. They may also suggest that other investors who have been waiting for volatility will finally surrender and sell, sending prices on their way to the bottom and the ultimate recovery of the cycle. Historically, bear markets return to their volatility levels in bear markets, as seen with the Dow in 2020. By December, the Dow had reached its all-time highs despite a 20% drop earlier in the year.

Sources

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Yahoo Finance. “S&P 500 (^ GSPC).” Bloomberg. “A Brief History of Bear Market Volatility in the S&P 500 and Beyond,” subscription may be required. S&P Dow Jones Indices. “Dow Jones Industrial Average.” Investor.gov. “Bear Market.”

Source: https://www.thebalancemoney.com/bear-market-rally-5192381