We all are aware of the basic terminology about bull market, bear market, and correction. In simple terms, a “bull market” is when the market moves higher and a “bear market” is when the market moves lower. However, one needs to understand that a new follow-through day and short-term uptrend do not necessarily signal a bull market. Similarly, short-term downtrend does not necessarily indicate a new bear market.
Bear Market versus Interim Correction
You still get interim corrections even within an upward trending bull market. This is when the major indices cool off a bit. The indices will consolidate for few weeks or months, before resuming their up move. This phase of consolidation is what we call as “interim correction.” The depth of these short-term corrections vary; it can be about 5%, 10%, or 15%. These interim corrections will be mild, not enough to change the underlying bull market. It is a general rule that, a decline of less than 20% indicates an interim correction. However, if the indices fall 20% or more, then it is a bear market. In the bear market, stock prices decline and the investor confidence is low. Although the length of the correction varies, bear markets typically last for a few months. Interim corrections usually last from few weeks to a few months. Bear markets are usually triggered by underlying weakness in economic condition. Typically, global or country-specific slowdown will initiate a bear market. The market, however, may or may not recover quickly from the bear market and cover up its losses. If it doesn’t, then it becomes what is called as a prolonged bear market. In a prolonged bear market, which may last for more than 2–3 years, general market sentiment is of despondency and only small intervals of upward rallies are there.
How CANSLIM can Help Investors through Market Turns
CANSLIM is a systematic approach, which can tell you when to be aggressive in a market where risks are low and rewards are high as well as will warn you to cut your position size when the risk-reward ratio contorts. When the market is in a bull run, the market status reflected by the CANSLIM methodology would be a “Confirmed Uptrend”. Further “Follow-through Days” during a Confirmed Uptrend signify the strength of the market and will be an opportunity to further increase your exposure and multiply your gains. However, more importantly when the market strength fizzles out, the status tracked according to CANSLIM will also start degrading and will turn into a “Downtrend.” This will be a signal for investors to reduce, and eventually call-off their bets, thus protecting their hard-earned capital.
Related: Distribution Days: How to Track Market Weakness in a Confirmed Uptrend
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