Bear Market Segments
This is my way of looking at this stage of the bear market.
We were waiting for the correction as market was in excess/distribution phase since November 2019 and now we have the bear run in full show. Most traders are in denial mode and bullish on the market.
Now that we are certain that we are in a bear market, let’s understand the bear market by dividing it in three segments.
- Denial- This is the phase where investors are not willing to accept bear market and buying on the dip (every decline in price) because of the past experience following the same theory that they were adopting in the bull market. So, investors are bullish per se, which is where we are currently. If you go on Twitter, it is flooded with messages such as, “This is the best buying opportunity”. Having seen the market bounce back from prior corrections, investors are assuming the history will repeat itself. So in early-stage during this phase, the majority of investors are still in a bullish frame of mind, as they are seeing profits in their account. They look at the fall as merely another buying opportunity (and are in a lookout for a “Higher low”) and think that stocks are cheaper now, so it is a perfect time to pick them.
- Concern- During the bear market there are intermediate bounces but these are usually nowhere near the previous highs (confirming a dead cat bounce). Eventually, the market tops out well below its previous high forming a major lower high and starts a new down-trend, which carries it to lower lows. During this phase the fundamental news significantly worsens and investors realise that a bear market is in force. This is the phase of concern. During this phase many investors sell, but others hang in feeling that the bad news is discounted and that a bottom is near. At this point, the market may rally again as many observers feel that the decline has ended and that a new bull market has begun. This rally, also characterized by weak breadth and low volume, subsequently fails and heads down.
- Fear – At this point, the majority becomes exceedingly bearish and most investors throw in their towel as they fear further fall in the market and that their investments will disappear. This is described as “Capitulation” and it is the worst phase for investors when stocks are sold based on emotion (fear) rather than rational analysis. It is at that point that the market is finally ready to make an important bottom. Investors must have patience and seek guidance from an expert. For traders, it will be a great opportunity, even if they couldn’t capitalise till now, let’s understand how? Bear markets always attract traders and people are often euphoric about it. On a broader perspective even if a trader makes around 30-40% of the total fall it will be very rewarding,
Capital/ Exposure : People often think that it is money that makes a person a trader or trading needs a lot of money, but it is other way round.
It is the Trader who makes money. So one can start with a small capital and make it big. In this case, there is not much to lose and one can always go back and see what needs to be changed.
The VIX & Options premium: Volatility index is one crucial aspect. India VIX is our volatility index, which helps us understand the current volatility in the market. When it is high at that point in time it is important for traders to understand the risk and also keep the exposure limited to be able to manage the mind part well. While the VIX is high (58.8) the
options premiums are also very high hence this is not the time to experiment. At this time if the trader is unable to understand the market then he must step back and sit on the fence till he gets a confirmation to trade.
One thing I am sure about is every adversity is an opportunity, so at the end of this trend, we will rise again as the long-term arc of the Indian stock market is up & growth-oriented.
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