Phases of a Bear Market
1. Recognition: During the recognition phase, positive investor sentiment prevails, marked by high prices. Investors, caught up in the prevailing optimism, may fail to identify the initial signs of a bear market. Instead, they may continue to actively purchase stocks, contributing to a temporary rally. This phase is characterized by a sense of optimism and a lack of recognition of the forthcoming downturn.
2. Panic: As the bear market unfolds, the panic phase sets in. Stock prices experienced a sharp decline, prompting investors to panic and hastily sell their holdings. Trading volumes may decrease, and economic indicators may start pointing toward a deteriorating economic situation. This phase is marked by heightened fear and a rush to exit the market.
3. Stabilization: In the stabilization phase, panic selling begins to subside, and investors start grappling with the reasons behind the decline in prices. Although the situation remains uncertain and turbulent, stocks halt their downward trajectory, creating a volatile but more controlled environment. This phase is characterized by a relative stabilization of market conditions.
4. Anticipation: During the anticipation phase, stock prices begin to level off and find a bottom. The allure of low valuations and positive news attracts more investors to purchase securities. Toward the end of this phase, some astute investors may recognize the impending bear market and choose to sell their securities. This phase represents a transitional period as the market braces for the full impact of the downturn.