There are many animals that stalk the corridors of the stock markets. Among the four-legged ones, we have the bull, cat, dog and even stags. But none is as dreaded or as unwelcome as the bear. For bears personify periods of great distress when the portfolio whittles down to less than half of its original worth.
The origin of the word `bear' in the stock market parlance can be traced historically to London jobbers who sold bearskins before they had received it, hoping to profit from the difference between the sale price and the near-future purchase price — akin to short-selling today. Investopedia defines a bear market as a prolonged period in which investment prices fall, accompanied by widespread pessimism.
There is no strict limit for the magnitude of fall that should be recorded before a bear phase can be pinpointed. But the consensus veers towards a drop of over 20 per cent from a long-term peak that prolongs for more than two months.
Falls that are less than 20 per cent would then be called a bull market correction. If we go by this definition, the correction of May and June 2006 would meet the percentage-of-drop criteria but it would fall short on the time criteria as it lasted less than two months. The correction witnessed since February 2007 is nearing the two months deadline, but the correction has been only 16 per cent from the peak of 14723.
So going by conventional parameters, we are not in a bear market yet. But even if we are, is it as bad as it is made out to be? As the saying goes, all good things come to an end. Investors should accept the fact that bear markets are part of stock market cycles. The value investors should welcome a bear market when the mood is absolutely pessimistic and the stocks have no takers. The blue chips can be picked up at attractive valuations in such periods of prolonged down trend.
Investors who dislike being in a market when the stock prices keep sliding lower can reduce their exposure to the stock markets and channel their money towards fixed income securities instead. Traders would be the least fazed by the onset of a prolonged down trend. All they would have to do is to change their strategy from buy-in-dips to sell-on rallies