The Bear Market

The Bear Market — Primary Downtrends are also usually (but again,
not invariably) characterized by three phases. The first is the distribution
period (which really starts in the later stages of the preceding Bull
Market). During this phase, farsighted investors sense the fact that
business earnings have reached an abnormal height and unload their
holdings at an increasing pace. Trading volume is still high, though
tending to diminish on rallies, and the “public” is still active but
beginning to show signs of frustration as hoped-for profits fade away.
The second phase is the Panic Phase. Buyers begin to thin out and
sellers become more urgent; the downward trend of prices suddenly
accelerates into an almost vertical drop, while volume mounts to
climactic proportions. After the Panic Phase (which usually runs too
far relative to then-existing business conditions), there may be a fairly
long Secondary Recovery or a sideways movement, and then the third
phase begins.


This is characterized by discouraged selling on the part of those
investors who held on through the Panic or, perhaps, bought during it
because stocks looked cheap in comparison with prices which had ruled
a few months earlier. The business news now begins to deteriorate. As
the third phase proceeds, the downward movement is less rapid, but
is maintained by more and more distress selling from those who have
to raise cash for other needs. The “cats and dogs” may lose practically
all their previous Bull Advance in the first two phases. Better-grade
stocks decline more gradually, because their owners cling to them to
the last. And, the final stage of a Bear Market, in consequence, is frequently
concentrated in such issues. The Bear Market ends when everything
in the way of possible bad news, the worst to be expected, has
been discounted, and it is usually over before all the bad news is “out.”


The three Bear Market phases described in the preceding paragraph
are not the same as those named by others who have discussed this
subject, but the writers of this study feel that they represent a more
accurate and realistic division of the Primary down moves of the past
30 years. The reader should be warned, however, that no two Bear
Markets are exactly alike, and neither are any two Bull Markets. Some
may lack one or another of the three typical phases. A few Major
Advances have passed from the first to the third stage with only a
very brief and rapid intervening markup. A few short Bear Markets
have developed no marked Panic Phase and others have ended with
it, as in April 1939. No time limits can be set for any phase; the third
stage of a Bull Market, for example, the phase of excited speculation
and great public activity, may last for more than a year or run out in
a month or two. The Panic Phase of a Bear Market is usually exhausted
in a very few weeks if not in days, but the 1929 through 1932 decline
was interspersed with at least five Panic Waves of major proportions.
Nevertheless, the typical characteristics of Primary Trends are well
worth keeping in mind. If you know the symptoms which normally
accompany the last stage of a Bull Market, for example, you are less
likely to be deluded by its exciting atmosphere.