Bearing upCreated : 8 February 2008 Written by : Dominic Picarda The appearance of a bear rightly fills us with terror . These fearsome creatures can often arrive without any warning whatsoever . one moment you ' re picnicking happily in the sunshine and the next minute you ' re cowering in the shadow of a giant grizzly up on its hind legs . If you ' re unlucky , you might end up getting mauled . The trick is to keep a cool head and follow a few simple rules . This lesson is equally true whether we ' re talking about brown bears in a forest or bear markets in equities . The latter can inflict vicious damage on your investment portfolio , which could be deadly if you ' re close to retirement . Knowing and understanding the beast is essential to coping in these situations . What is a bear market ? A bear market is usually defined as a fall in a stock market index of 20 per cent or more . Smaller drops are usually labelled as corrections of varying degrees . Of course , this is merely a rough rule of thumb . Just because a market falls only " 19 per cent and doesn ' t quite qualify as a bear market won ' t cheer an investor who ' s suffered a substantial drop in portfolio value . According to Dow Theory - a branch of technical analysis - a ' primary ' bear market occurs when an index drops below its last ' secondary ' low . For instance , in July and August 2007 , the FTSE 100 experienced a downwards correction against its larger , upward trend , which took it down to 5822 . The UK ' s main index then rallied back up almost to its previous highs in November and then dropped to 5339 in January . Because that move breached the prior secondary low at 5822 , the primary trend of the market is said to have changed from upwards to downwards . So are we in a bear market now ? According to Dow Theory principles , the FTSE 100 registered a bear market when it dropped below 5822 . The primary trend will continue to be classified as downwards until the index makes a high above 6754 . By definition , the FTSE 250 index - which is made up from medium - sized firms - is in a clear bear market . From peak to trough , it has dropped 27 . 5 per cent . How long do bear markets last ? History is probably the best guide to where this bear market could take us . This bear market has already lasted more than 160 trading days . But really prolonged bear markets can last a great deal longer . Thankfully , bear markets appear to have become rather shorter in the modern period . Nineteenth century bear markets were frequently multi - year events . The table below gives you an idea of how long various bear markets have lasted . Year % fall from peakDuration ( months ) Mar - 1825 to Mar - 1831 - 62 . 772 Apr - 1836 to Nov - 1841 - 30 . 367 Sep - 1845 to Oct - 1848 - 37 . 735 Nov - 1865 to Oct - 1868 - 27 . 935 Oct - 1873 to Jul - 1879 - 36 . 168 Feb - 1900 to March 1909 - 20 . 6109 Apr - 1911 to Oct 1921 - 25 . 5126 Sep - 1929 to Jun - 1932 - 52 . 333 Jan - 1937 to Jul - 1940 - 39 . 141 Jul - 1957 to Feb - 1958 - 22 . 17 May - 1961 to Jun - 1962 - 26 . 713 Jul - 1966 to Nov - 1966 - 18 . 74 Feb - 1969 to Jun - 1970 - 37 . 616 Aug - 1972 to Dec - 1974 - 69 . 727 Jan - 1976 to Oct - 1976 - 28 . 79 May - 1979 to Jan - 1980 - 17 . 98 Jul - 87 to Oct - 1987 - 35 . 94 Jan - 1990 to Oct - 1990 - 19 . 69 Jul - 1998 to Oct - 1998 - 24 . 92 . 5 Jan - 2000 to Mar - 2003 - 50 . 638 Would a US recession cause a UK bear market ? Since 1945 , there have been 11 recessions in the United States . Six of these have occurred in similar time frames to bear markets in the UK . The tendency for the UK to suffer a bear market around the time of a US recession may have strengthened over the years . Four of the five post - war US recessions when there was no bear market in the UK took place in 1960 or before . The stock market is , of course , a forward - looking mechanism . Therefore , we would logically expect bear markets to precede recessions and to end before the recessions do . Experience bears this out . With one exception , every single post - war UK bear market coinciding with a US recession started before the US recession began and ended before the US recession ended . on average , UK bear markets have started five months before a US recession and they ' ve tended to end about four - and - a - half months before the corresponding US recession ends . Are you better off with value or growth shares in a bear market ? There ' s a belief that ' cheap ' or ' value ' shares are a better bet during a bear market than more expensive growth shares . Intuitively , we might expect growth shares to have higher betas than value shares and therefore for them to fall more when the market does . In reality , though , things aren ' t as clear cut as this . Looking at the MSCI UK indices , we can see that in the six major UK stock - market corrections since 1976 , honours are even between value and growth . During the current sell - off , growth has taken a commanding lead over value . Growth ' s decent showing during bear markets could have something to do with economic weakness . While they don ' t overlap precisely , bear markets are often associated with recessions , or at least a weak economy . Such periods tend to see falling interest rates , which are beneficial to growth firms . A lower discount rate increases the present value of their future cash flows more dramatically than for value firms , and hence justifies a higher share price . How do other assets do during equity bear markets ? As we ' ve seen , shares generally do badly in absolute terms during bear markets . Some sectors and individual issues do better than the rest , but usually only in relative terms . However , there are plenty of options outside of the stock market to protect and grow your wealth . The most obvious thing to hold is cash . A savings account should yield a positive nominal return via the interest rate paid . And you ' re pretty much guaranteed that your underlying capital will remain safe . Cash may sound unimaginative , but it really comes into its own during a prolonged slump . In the 2000 - 03 meltdown , £ 1 , 000 invested in the FTSE All - Share would have shrunk to about £ 550 - even with dividends reinvested . By contrast , £ 1 , 000 in cash would have grown to about £ 1 , 185 . A more interesting alternative would be to hold your savings in a foreign currency . The Swiss franc has risen in every UK bear market or correction since 1965 , except once where it only fell by 1 . 5 per cent . Its average annualised gain during these periods is 13 per cent . But we ' re being conservative here and assuming no interest received on the deposit . Adding this on would clearly make things more attractive still . The euro seems to work just as well for this purpose ; see the table below ( of course , the euro wasn ' t around in 1966 - we ' ve used its precursor , the Ecu , as a proxy ) . Another asset that may do well while the UK market suffers is property . on only one occasion since 1965 have nominal house prices declined significantly at the same time as UK equities . Unfortunately from the perspective of today ' s investors , that occasion was 1990 , a period that rather resembled the current situation . Gold is famed for its protective ability in times of worry . The historical record bears this out . In every correction since 1979 , gold has risen in absolute terms when UK equities have fallen . In the current environment - where inflation is once again a major fear - gold is likely to continue performing its traditional role . YearSFR vs £ � vs £ House pricesGold 1966 - 1 . 51 . 52 . 4 - 1969 - 702 . 627 . 621 . 0 - 39 . 71972 - 7413 . 814 . 811 . 41367 . 9197638 . 054 . 98 . 2 - 16 . 71979 - 19802 . 44 . 529 . 21058 . 419875 . 91 . 8 - 0 . 36 . 319905 . 7 - 24 . 2 - 17 . 87 . 1199845 . 832 . 9 - 0 . 52 . 22000 - 20034 . 92 . 814 . 658 . 3 Average 13 . 113 . 07 . 6305 . 5 How do we know when we ' re near the bottom of the bear market ? You need to be long - sighted when it comes to calling the bottom of bear markets . The news will inevitably look hideous just at the time the stock market turns up from rock bottom . The headlines will be full of gloomy talk about ongoing economic weakness , with job losses and falling profits . After long and savage bear markets - such as that of the mid - 1970 s or 2000 - 03 - equities are a word not uttered in polite society . Such things are fairly imprecise indicators of the bear ' s demise . We can also look for signs of capitulation in momentum oscillators . A simple technique is to see how far the market is trading from its 200 - day moving average . Just as it will be way above it at the top of the market , it will be significantly below it come the bottom . YearDistance from 200 - day avg . start ( %) Distance from 200 - day avg end ( %) Net % swing 19666 . 7 - 11 . 3 - 18 . 01969 - 7013 . 6 - 17 . 0 - 30 . 61972 - 748 . 9 - 38 . 8 - 47 . 7197617 . 4 - 22 . 5 - 39 . 81979 - 8021 . 03 . 8 - 17 . 2198729 . 2 - 26 . 3 - 55 . 519908 . 6 - 12 . 5 - 21 . 1199811 . 2 - 18 . 2 - 29 . 42000 - 039 . 2 - 18 . 2 - 27 . 4 Bear markets on the chartsBear market rallies exist to catch us out . After a huge sell - off , the market picks up strongly , convincing many investors that good times have replaced the bad times again . However , the dawn subsequently proves to be a false one . The rally reverses and the bear market resumes with a vengeance . This pattern will be familiar to anyone who was involved in the market between 2000 and 2003 . In that period , the FTSE 100 enjoyed several strong bounces that gave false hope to bulls and probably cost them a fair bit of money , too . It is now obvious that the FTSE ' s progress between August and November was a bear market rally and therefore that the correction that began in July never really ended . Of course , hindsight is a wonderful thing . But at least one theory gave us strong hints that we should have distrusted the index ' s comeback right from the start . The Elliott Wave Principle has much to say about the nature of market corrections . According to this branch of technical analysis , a ' flat ' correction is one where the market sells off and then recovers close to its previous high - and perhaps even beyond its previous high - and then resumes its downtrend . Flat corrections are primarily identified as such by their form . They are known as ' 3 - 3 - 5 ' corrections because of their structure . The first leg of the summer sell - off developed in three waves , rather than five . This was a vital clue that the correction might be of the flat variety , a suspicion that was confirmed once the August - November rebound also occurred in three waves . As a result , Elliotticians would expect the correction to complete with a five - wave sell - off . The Wave Principle highlights some likely ending targets , using the Fibonacci relationships between the various waves . Having already exceeded its August low of 5822 , we might typically expect a flat correction to terminate somewhere near 5246 . A more severe sell - off might take us down to 4314 . Conventional technical analysis also suggests a correction ending below 5000 . The dimensions of the ' double - top ' pattern formed by the summer ' s price action gives a measured price objective of 4890 . Taking an even longer - term view , Elliott Wave Theory suggests an even more frightening scenario . What if the entire stock market recovery since 2003 was nothing more than a giant flat correction ? As far as the Dow Jones index is concerned , this is the interpretation favoured by Robert Prechter , the world ' s leading authority on the Wave Principle . If correct , this view would have terrifying implications for equity markets over the coming years . The final leg of this bear market would be a devastating five - wave decline that could easily take the FTSE 100 back to its 2003 lows of 3278 . But it could be even worse . A more severe decline would potentially knock around 5943 points off the index , taking it to an all - time low of just 811 . Elliott Wave Theorists have developed a reputation over the years for making extreme predictions such as these . Bob Prechter , for example , correctly forecast the greatest bull market of all time during the dark days of the 1970 s . Having achieved guru status through this forecast , he then turned into an ultra - bear in the 1980 s , calling for a catastrophic collapse in equities . He has retained this stance ever since , so far without seeing his prophecies realised .