Breaking down the Bulls, Bears

Q. What do the terms bull market and bear market mean, and where do these terms come from?

A.Bull and bear markets have become a kind of shorthand designation for rising or falling markets. In a bull market, stocks are seen to be in a rising trend. And conversely, in a bear market, it is expected that stock prices will continue to fall.

The terms bull and bear may be applied to the entire "market" or to individual stocks or groups of stocks. For example, you may hear the term: "I'm bearish on that stock" from someone who expects the price to fall.

Scholars have traced the origins of the word "bear" to the 18th century fur traders, who sometimes sold the bear skins they planned to trap before they had even captured the bears. Thus, they hoped prices would fall after they sold. And the term "bull" has been said to derive from the old blood sport that pitted bears against bulls in fights to the death.

Other market historians point to the illustrations of a bull and bear as describing market trends: The bull has its horns pointed upward; the bear claws point downward.

While there is little agreement on the origins or the symbols, there is much greater accord when it comes to describing what constitutes a bull or a bear market. While a bull market is often described as an "extended period" of rising stock prices, a bear market is typically defined as a price decline of 20 percent or more over at least a two-month period.

While that measure doesn't tell you how much farther the market will fall, or how long the bear market will last, it does at least define expectations that prices will fall further.

According to market historian Jim Stack (www.investech.com), the median duration of a bear market is 15 months -- from peak to bottom. The historic bear markets of 1929 and 1938 lasted 33 and 42 months, respectively. (Yes, those were two separate bear markets, because of the rally in between.) The current bear market, which started in 2007, has lasted 17 months.

Just as bear markets differ in duration, they also differ in depth of decline. Stack's research shows the average bear market decline (excluding 1929) is 33.5 percent. But the 1973-74 bear market, and the 2000-01 bear markets each saw broad market indexes decline nearly 50 percent. The current bear market (based on the S&P 500 index) peaked Oct. 9, 2007, and fell 57 percent to its recent bottom March 9.

It's also important to recognize that there have been extended periods where stock prices, in general, moved sideways. For example, after the bear market decline that took the Dow Jones industrial average from over 1,000 in 1972 down to below 600 in 1974, prices moved within a narrow range for years. The Dow was still under 800 in 1982, before the recent bull market began.

Each bull or bear market has its own characteristics. And that is what makes it so hard to define them, except in hindsight. Even declining markets may contain sharp rallies upward. That generates the debate over whether a sudden upturn marks the end of the bear and the start of a new bull market. Or whether it is just "a rally in a bear market."

Some market "technicians" watch for patterns or "waves" -- and compare those patterns with past market behavior to predict future directions for the market. One of the oldest and most respected of these technical patterns is the Elliott Wave Theory.

In a recent column, I noted that Bob Prechter, (www.ElliottWave.com), the most respected interpreter of that theory, believes the upswing of the last two months is a "bear market rally" and this market will make new lows.

But Stack, an equally respected market technician, says we've already seen the bottom and are at the start of a new bull market! Stack points out that his technical indicators such as the "advance/decline line" as well as measures of "relative strength" and even popular sentiment indicate the market has already seen its lows.

You see, there are always differing opinions on Wall Street about whether the market -- or individual stocks -- are about to rise or fall. That's the whole point of the market. It's a place where buyers and sellers agree to disagree -- at a specific price. And we'll only know for sure who's right in hindsight! That's The Savage Truth.

To celebrate the 20th anniversary of my Chicago Sun-Times column, I'll be responding to your most frequently asked questions on a regular basis. Of course, you always can submit individual questions on my Sun-Times blog reached on the home page at www.TerrySavage.com.