The S & P 500 is inches away from a decline of 20% from its recent closing high on February 19. This, we are told, would constitute a “bear market.” But who decided that a drop of 20% was a “bear market?” For that matter, who decided a drop of 10% was a “correction?” If you think a committee of sage Wall Street veterans got together to vote on it, you’d be mistaken. The whole idea of labeling a decline of 10% to 20% a “correction” and 20% or more a “bear market” was largely the work of one man. Alan Shaw was one of the legendary founders of technical analysis. He was co-founder of the Market Technicians Association (now the Chartered Market Technician Association) and was managing director of the technical research department at Smith Barney. Magnitude of decline He retired in 2000, but long before that he had developed a simple method for describing the magnitude of market declines. “Alan tried to make it simple and easy,” Louise Yamada told me. She would know: Yamada started working with Alan in 1980. By then, she said, he had already established his basic framework. “He would say anything up to 10% was a consolidation, 10% to 20% was a correction, and more than 20% was considered a bear market,” she told me. After Alan retired in 2000, Louise took up the technical analysis reins at Smith Barney until 2005, when she, too, left and set up her own firm. Louise noted that other technicians have their own definition of what constitutes a bear market, but that the “correction” and “bear market” terms that Alan created for 10%-20% and 20% or more declines struck a chord in the public imagination. “It’s just so easy and simple to remember,” she said. Measuring the start of a bear market One point everyone agrees on: determining a 20% decline is based on closing prices, not intraday. Based on this, S & P Dow Jones Indices noted that the historic closing high for the S & P 500 was February 19 when it ended the day at 6,144.15. To get to a 20% decline, the S & P 500 would have to close at 4,915.32. One other point: closing at or below 4,915.32 is not the start of the bear market. The start of the bear market would date from the day of the market high, February 19. “A bear market starts with the 1st downtick after the final price high,” Tom McClellan, editor of The McClellan Market Report, told me. “It does not start once you reach 20%. The entirety of the decline is ‘bear market territory.'” This is a point that S & P Dow Jones Indices also emphasized: “If the index closes at 4,915.32 (-3.13% for the day) or lower today, we will classify 2/19/2025 as the ending date of the Bull market (6,144.15) and starting date of the Bear,” the firm said in a note to clients on Monday. The path ahead “If you say we are down 20%, it doesn’t do you any good, it doesn’t tell you what will happen next,” McClellan told me. His advice: “Go with the trend, unless you have a compelling reason to go against the trend.” What is the trend? “We have been in a downtrend, but we are so oversold it is unlikely to continue, so the probability of a bounce is very high.” Then what? “Then you have to evaluate the quality of the bounce,” McLellan said. Alan Shaw passed away several years ago, but Louise Yamada is still teaching her classes on technical analysis, and says we may not be at a bottom. “What we are all looking for here is for a Bear Market Rally which Alan defined as a rally of 10% or more that follows a market decline of 20% or more,” Yamada noted, “after which the market declines to a new low.” That’s when, “THE BEAR CLAW COMES OUT again.” Ever the market historian, Yamada noted the average bear market rally for the S & P 500 from 1929 thru 2020 is 18% over 31 trading days.
