The Wall Street Journal and other media outlets often use 20% thresholds to label traditional uptrends and downtrends, stating a new bear market has begun when an index or other security falls 20% off its peak. Conversely, they announce the start of a new bull market when an index or other security rises 20% off its low. This logical approach can produce great controversy at times because a financial instrument that sells off from 20 to 1 in a bear market will enter a media-sanctioned bull market when a bounce gains 20-cents, lifting the instrument to 1.20 while marking a 20% rally off the low.
In the simplest definition, rising price signifies a bull market while falling price signifies a bear market. With this in mind, you might think it would be easy to determine what type of market we're grinding through at any point in time. However, it's not as easy as it looks because bull-bear observations depend on the time frames being examined. For example, an investor looking at a 5-year price chart will form a different opinion about the market than a trader looking at a 1-month price chart.
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Let's say the stock market has been rising for the last two years, allowing an investor to argue that its engaged in a bull market. However, the market has also been pulling back for the last three months. Another investor could now argue that it's topped out and entered a new bear market. In sum, the first argument arises from looking at two years of data while the second arises from looking at three months of data. In truth, both points of view may be correct, depending on the viewer's particular interests and objectives
In reality, markets form trends in all time frames, from 1-minute to monthly and yearly views. As a result, bull and bear market definitions are relative rather than absolute, mostly dependent on the holding period for an investment or position intended to take advantage of the trend. In this scheme, day traders attempt to profit from bull markets that may last less than an hour while investors apply a more traditional approach, holding positions through bull markets that can last a decade or more.
Bottom line: there's no perfect way to label a bull or bear market and it's easier to focus on specific time frames or by considering the sequence of peaks and valleys on the price chart. Charles Dow applied this method with his classic Dow Theory, stating that higher highs and higher lows describe an uptrend (bull market) while lower highs and lower lows describe a downtrend (bear market). He took this examination one step further, advising that bull and bear markets aren't "confirmed" until major benchmarks, the Dow Industrial and Railroad Averages in his era, make new highs or new lows in tandem.
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