Jargon Decoded: Bear market terms

What is a death cross, and what does it signal? (Stock Image)
What is a death cross, and what does it signal? (Stock Image) (Stock Image)

When analyzing a period of market decline, financial analysts and investors use terminology that may be hard for the average person to understand. While these terms may sound like technical jargon initially, their concepts aren't so challenging, and can prove useful amid the market turmoil.

Bear market

A bear market is a period of time during which the stock market experiences prolonged price declines. The beginning of a bear market is often described as a time when the entire market experiences a drop of more than 20 per cent from previous highs. The end of a bear market is likewise defined as a rise of 20 per cent for the entire market from its recent lowest point.

Inverted yield curve

An inverted yield curve is a phenomenon in the bond markets that can be a signal of a coming recession. An inverted yield curve means that short-term government bonds, such as 3-month bonds, begin to offer higher yields, or returns, than longer-term 10-year bonds. Bond yields can be seen as a reflection of investor confidence in the economy's future. As bond prices rise, their yields fall. When long-term yields drop below short-term yields, this may mean that investors are moving into long-term safer investments, fearing a recession on the horizon.

Death cross

The death cross is a stock market chart pattern found by looking at a stock or index's moving averages. A simple moving average is the average price of a stock across a static time frame. For example, a 50-day moving average is a trendline showing the average closing price across the last 50 days.

A death cross simply means a situation where a shorter-term moving average crosses below a longer-term moving average. An example would be a 50-day moving average line crossing below a 200-day moving average line. A death cross is often considered a symbol of a bear market.

Market capitulation

A market capitulation is a period during a market downturn when a significant number of investors who bought in at a higher price give up hope on the market going up again soon and sell at a loss. Investors, who had previously hoped they may still be able to break even or turn a profit if the market improved, begin to believe that the market is instead going to fall further. Believing this, they sell their assets to avoid further losses.

When enough investors sell like this, supply floods the market and prices drop suddenly. Ironically, a market capitulation is often considered a sign that a bear market may be ending.

Rule of 20

The rule of 20 is a market indicator that can be used to analyze individual companies and the market as a whole. The rule of 20 combines two statistics: the market price ratio to market earnings and the rate of inflation. If the P/E ratio and the added inflation rate equals 20, then financial analysts would say the market is in balance. The stock market is considered undervalued if the sum is below 20 and overvalued if it is above 20.