A typical Stock market goes through many stages. Always remember that a stock market does not always follow these stages in the exact order.
1.Significant selloffs: It has been a while since markets have seen exceptionally strong selloffs, but the S&P 500 struck a new bottom for 2022 during the week of September 26. These sharp declines in price are typical of a bear market, followed by brief rebounds..
2.Mutual-fund redemptions: At this point, horrified investors sell their mutual funds after reviewing their quarterly and monthly statements (also, some investors refuse to look at those reports). Mutual fund companies are hence compelled to sell (which negatively affects the stock market). Mutual fund redemptions typically rise when the indexes drop by more than 20%.
3.Wrong Predictions: As the bear market drives stock prices lower, it appears that the majority of economic and financial news is unfavorable. Many people start to doubt the bullish forecasts made by market experts who earlier had assured the market would keep rising. Some bullish experts are mocked or ignored during the worst bear markets. Even ardent bulls are growing anxious as the market continues to decline.
4.Capitulation: Many investors are in a panic after weeks and months of selloffs (and sporadic rebounds). Investors are aware that it could be years before their portfolios break even, and that some equities may never do so. Trading volume is more than three times more than usual during the last phase of a bear market. Even some ardent believers sell their holdings because several portfolios have fallen by 40% or more. With the exception of fixed income securities like CDs and T-bills, almost every financial asset has decreased in value. The most suffering is experienced by traders or investors who use margin.
5.Bad-looking charts: Observing a stock chart is the quickest way to spot a bear market. It should go without saying that both the daily and weekly charts are awful. While rallies often ease the tension, they rarely continue for very long.
6.Low Trading Volumes : Rallies with low volume: When stock prices rise with little volume, this is another sign of a bear market. Although algos and hedge funds might be, this is a sign that the large financial institutions aren’t buying. One of the causes of massive rallies that end the next day is the easiness with which algos may raise prices in low-volume situations.
7.Missed rallies: The first indicator that a bear market has begun is a failed rally. Before the market “officially” enters a bear market, failed rallies frequently take place. The bear’s claws will have dug in if the rally has no legs and is unable to advance during the ensuing days or weeks. Bulls will be led astray along the road by numerous failed rallies into believing the worst is past.