When is a “Bear Market” Not a Bear Market?

There was a fair amount of recent commentary about the Philadelphia Semiconductor Index (SOX) entering bear market territory after pulling back 20% from its June 22^nd high.  Personally, I have a significant problem with the mechanical construct of -10% and -20% declines signifying a correction and a bear market, respectively.  Those numbers make sense when discussing broad market moves but have much less relevance for narrow-based measures.

 Let’s start with a visual.  Does this look like a bear market to you?

SOX, 6-Months, Daily Candles with 10-day (red), 30-day (blue), 50-day (yellow), and 100-day (green) Moving Averages

Source: Interactive Brokers

Might one credibly argue that this looks like a topping pattern or be concerned that shorter-term moving averages have turned lower?  Certainly.  But we still see longer-term moving averages pointing higher, and that upward sloping 100-day moving average remains about 15% below the current index level. 

More importantly, can an index that remains more than 70% up in just over 3 months be considered a bear market even if it pulls back 20% from its highs?  I contend that it is hardly appropriate.

A bear market is more a state of mind than an arbitrary mathematical cutoff.  Bear markets are accompanied by a feeling of existential dread, or a sense that little good can come from investing, and in a true bear market, those feelings persist for an extended period.  One of my early bosses said to me that a good day in a bear market is when we close off our lows. 

Quite frankly, the vast majority of younger and newer investors have never experienced a true, prolonged bear market.  Indeed, we had significant pullbacks during 2022 and 2018 (the last two midterm election years), but they were measured in months, not years.  The Covid bear market was the result of existential dread, but it was short-lived, thanks to massive fiscal and monetary stimulus.  The last true bear markets were in the 2007-2009 (Global Financial Crisis) and the 2000-2002 (Internet Bubble) periods.  Frankly speaking, if you are a US investor and weren’t in the markets during those events, you have not experienced a bear market.  They used to happen with some regularity, but we have been blessed with expansionary financial conditions, a deft Federal Reserve, and investor psychology that have kept long bear markets at bay.

As for the 20% definition: we need to take into account the normal volatility of a market before arbitrarily declaring whether it’s in a bear (or bull) phase.  Note that the historical volatility of a semiconductor proxy (SMH, since SOX does not have listed options) is much higher than that of the S&P 500 (SPX).  On a long-term basis (200 days), SMH’s volatility is more than 3x higher than SPX, and in recent weeks it has been about 4x higher.  If 20% is rightly considered extreme for SPX, it is hardly as noteworthy for semiconductor stocks.

SMH, 6-Month Chart: 30-Day (orange) and 200-day (blue) Historical Volatilities, with Implied Volatility (white)

SPX, 6-Month Chart: 30-Day (orange) and 200-day (blue) Historical Volatilities, with Implied Volatility (white

While I’m highly dismissive of calling the recent drop in SOX a bear market, today’s bounce is certainly welcomed by those who are long semiconductor shares.  As of now, we are only back to the index’s 10-day moving average, though, meaning that it is too early to call this a definitive turnaround.  But remember, since bear market rallies tend to be short, sharp, and ferocious, maybe those who are trading from the long side should hope for that characterization for a few days.