When markets lose 20% or more of their value (referred to as a bear market), we could begin moving toward the other end of the cycle—into a new rising phase (referred to as a bull market). Remember, markets are cyclic. After long-drawn-out periods of losing value, they are generally well poised for a potentially longer bullish period of regaining value.

The bearish phase

The graph indicates the rapid descent in value of the Toronto Stock Exchange (TSX) and the deep erosion in October-November 2008.

The impact of massive debt, potential business failures (such as those of General Motors, Chrysler, and Ford), and the bank bailouts or programs, which the taxpayer ultimately pays for, may lengthen the time prior to the bull cycle.

The following are signs that may help us recognize that a bull market may be getting closer.

1. Investor resignation. In market cycles there comes a point when investors don't feel bullish anymore. They pull in their horns, so to speak, and sell off their stock holdings for fear of loss. We notice a bear market beginning when the markets reach about a 20% or more drop in value. A bear market can bring further decline beyond 20% if negative media effects panic selling, We have witnessed an accelerated drop in value as the S&P/TSX Index lost over 40% between May and November 2008.

2. Great stock market bargains present themselves. The wise investor begins to buy up bargain stocks at lower prices (and the wise investment fund investor buys up investment fund units at lower values).

3. Interest rates drop. As we near a bull market, interest rates are generally low or decreasing. This bolsters the economy, and businesses begin to borrow money for expansion, leading to higher profits.

4. Lower inflation. When inflation is low, or at least not increasing, purchasing power increases, as does market optimism. The extreme of this is reduction in consumer prices, especially where bubbles have developed, as in the real estate industry.

5. Increased market trading. When people panic and sell off their stocks or funds in the bear market, the selling pushes stock market prices lower. If the panic selling continues due to fear, a settling eventually occurs once all of the most fearful investors have finalized their selling. They place their cash in the bank or money market funds. These investors will remain cautious until they see the bold investors begin buying up the stocks that have shrunk in value, investing vigorously once the selling seems to have settled. Those who sold out of fear will not necessarily notice when the markets are rising again, signalling the beginning of the bull market (noticed by higher and increasing volumes of trading). More money will then flow into the equity investment fund market indicating confidence in business and a rising market.

Bull market indicators

The S&P 500 crossed from bear market into more bullish territory on Monday, Dec. 8, 2008. The definition of a bull market is a 20 per cent gain from an index's lowest point. This low point occurred on Nov. 20, 2008, and the gains at Dec. 8 were more than 21 per cent (the first 20% rally in 408 days). Or, to put it another way, the bear market lasted 408 days, during which the S&P 500 fell 51.9 per cent. That's the third-worst ever bear market since 1927, and the worst since 1938.

The S&P/TSX composite index has also risen about 20 per cent from its trough (notably on Nov. 20). We may expect to see more volatility as the bull tries to get his footing before charging.

The last bull market

By looking back in time, you can see the rapid incline to mid-2008. The debt bubble broke in 2008, and the rapid decline in value occurred. Now it is time to begin thinking about the recovery phase and the massive profits this can bring to investors who purchase stocks and/or fund units at bargain-basement prices.