A bear market is defined as a period where the stock market experiences a major downturn, typically viewed as a drop of 20% or more from the most recent high. While a bear market sees sellers dominate the narrative, it often prompts a rethink from contrarian investors who might ask themselves - have we hit a bottom?

What more, it not uncommon to see rallies during a bear market, which can make it difficult for investors to gauge whether a new cycle has begun, or the rally is merely a temporary relief in the midst of a prolonged downturn.

If you've never invested during a market downturn, here are some tips to protect your portfolio.

In the meantime, history tells us the following indicators might be useful to assess whether a bear market is over.

Bear Markets Rarely End Quickly, Albeit Before a Recession Ends

Since the end of the Second World War, the US stock market has gone through 13 separate bear markets. The average loss recorded across all prior bear markets up until the one in 2022 was 32.7%.

More importantly, the average time it took for the stock market to descend from a high to its bear market low was an average of 12 months. The average time for the stock market to reclaim its losses is nearly twice as long at 21 months. One recent exception to this was the bear market at the start of the COVID pandemic, which lasted just 40 days.

Across an even longer timeframe, the results don't change all that much. From the onset of the Great Depression in 1929, the average decline across 30 separate bear markets is 29.7%, while the average duration of this downturn was 341 days.

However, bear market rallies are a regular occurrence, with short squeezes and value investors sometimes prompting a rally thanks to surging prices across a narrow band of stocks for a short period. In several instances, these rallies have been significant, however, the median gain across the most prolific bear market rallies is 11.5% over a duration of 39 days.

Another interesting fact to come out of Ned Davis Research is a long-term trend that sees the stock market peak at a median of 5.3 months before a recession starts, while a bear market bottom is realised approximately four months before the end of a recession.

Signs of Market Capitulation

It not uncommon for a bear market bottom to be characterised by an event known as market capitulation. 

This is where a loss of investor confidence prompts intense selling activity that culminates in very large and sharp falls during trading sessions. It is indicative of the fact that very few buyers are stepping up to buy shares, and sellers have overwhelmed the market. 

In effect, market capitulation sees sellers exhaust their supply, prompting those who would have exited the market to exit the market. Investors raise the white flag, sell their equities, and rush to the sidelines for safety.

Market capitulation is most common during periods where there is great uncertainty and high volatility within the market. Fear often takes over and you might say there is peak pessimism' and bearish rhetoric in the market, with few investors prepared to call the end of a sell-off. 

This will be most evident on days where key stock market indexes record large single-digit declines - perhaps upwards of 5% or more - and plunge straight through key technical resistance levels, even after already being well off their highs. The standard deviation of the variance in a day trading action may suddenly spike into the multiples.

Stock Market Breadth

If bear market rallies are typically defined by a narrow number of rising stocks that lead the way, then stock market breadth is something different altogether. Breadth refers to the amount of stocks that are participating in a particular trend across the stock market.

When a movement is characterised by narrow breadth, the index may be rising, but it is mostly due to a small number of stocks that have posted large increases. On the other hand, more breadth implies a greater number of stocks are moving in sync with the strength of the overall market, and each stock is also responsible for the rally. 

Market breadth has signalled the turning point for various bear markets in the past. The strength of this indicator is greater when it occurs over various days, rather than a single trading session, no matter how great that breadth may be. In other words, the duration of the breadth thrust', and the associated share price increases are just as important as the number of stocks participating in a move.

One of the highest readings for breadth in recent years was 98% back on December 26, 2018, when almost every stock in the S&P 500 rose. As history would have it, that session just so happened to be the first trading session following what would turn out to be the market low for that downturn.

Technical Indicators Hold Up

Support and resistance levels, as well as moving averages are strong psychological barriers in the stock market. 

Buyers are often lined up at support levels, and if the market is generally able to hold up above a key support threshold, it is typically viewed as a positive for trend reversal. This becomes more convincing if the market touches that support level several times - something dubbed a double or triple bottom - and rebounds on each occasion.

On the other hand, the market will still need to push higher through key resistance thresholds, otherwise rejection may signal the resumption of the broader downtrend. Momentum is one of the strongest indicators in the market, and breaking through both a key resistance level, and trading higher than a 50 or 100-day moving average is widely regarded as a bullish sign.

Many technical analysts look out for a specific pattern called the Golden Cross, where the 50-day moving average crosses and moves above the 200-day moving average. 

This suggests momentum has shifted, and while an uptrend in the 50-day moving average alone may seem promising, there is always a risk of a false breakout. This is why an overlay against a longer trend is helpful. If accompanied by an initial period of consolidation - where prices move sideways on low volume and volatility - and trading volumes increase thereafter, this suggests investors agree with the trend.

The cross may take place some time after the market has officially bottomed, so this reference may be considered a lagging indicator, but one that confirms a shift in sentiment.

Changes in Macro Fundamentals

If you're an investor instead of a trader, changes in macro fundamentals may resonate more with you in terms of identifying a potential turning point in a bear market. 

The end of a bear market sometimes sees negative news seemingly no longer have a negative impact on stock prices. This might include news about aggressive interest rate hikes, confirmation of a recession, or even persistent inflation figures. 

In fact, this sort of negative news cycle often has an unintended consequence. It may prompt investors and traders to bet on future monetary policy support, or a lighter' touch from central banks or government officials given the risk that by failing to do so, they could make an already bad situation worse. For example, hiking rates less than expected so as to avoid a deep recession.

Basically, one of the key drivers of a longer-term rally setting in is a shift in systemic risk by way of regulatory action, monetary policy, or government policy. In contrast, short-term bounces that tend to be characteristic of bear market rallies are more commonly associated with corporate news.  

The Reality of a Bear Market End

Of course, not every bottom in a bear market is signalled by capitulation, nor can we rely on history as a guide to determine how long a downturn might last. Often, the only effective judge to determine if a bear market is over is hindsight.

What more, a turnaround is all relative, because a short-term rally could be very conducive for traders to do well, but long-term investors may be caught out by false hope. 

Nonetheless, if you are looking for indicators that shed insight on investor sentiment, these observations may be useful to determine your next steps.