The headline index is close to its record high, the news says markets are strong, and yet many of the shares you follow are down 20, 30 or even 50 per cent from their peaks. That uncomfortable gap has a name. Traders call it a stealth bear market, and it is one of the most important things a beginner can learn to spot.
What a stealth bear market is
A bear market is usually defined as a fall of 20 per cent or more from a recent high. A stealth bear market is when a large number of individual shares, or a whole group of them, fall that far while the main index barely shows it. The damage is happening below the surface, hidden by a small number of very large companies holding the index up.
This happens because most major indices, such as the S&P 500 and the Nasdaq 100, weight companies by their size. If the biggest few names are doing well, they can offset falls in hundreds of smaller ones. We explain the basics in our guide to bull and bear markets.
Why it matters
A stealth bear market tells you that market leadership is narrowing. Fewer and fewer stocks are doing the heavy lifting. That can carry on for a while, but it makes the index more fragile, because if one or two of the leaders stumble, there is little underneath to catch the fall.
It also matters for ordinary investors because their own portfolios may look nothing like the index. Someone holding a spread of technology names that have fallen sharply can feel they are in a bear market, even while the headlines talk about records.
How to spot one
Traders look at measures of market breadth, which describe how many shares are taking part in a move. Useful ones include the percentage of stocks trading above their 200-day moving average, the number of shares making new highs compared with new lows, and how an equal-weighted index performs against the normal market-cap version. If the headline index is near its high but fewer than half of its members are above their long-term averages, that is a warning sign.
Another simple check is to count how many well-known names are 20 per cent or more below their peaks. When that list includes household technology names while the index is barely off its high, the stealth bear is in plain sight.
A simple example
Imagine an index of ten companies where the two largest make up half its value. If those two rise 10 per cent and the other eight fall 10 per cent on average, the index is roughly flat. On paper nothing has happened. In reality, most of its members are in a downtrend.
How traders use it
Traders treat a stealth bear market as a reason for caution rather than panic. It can mean being more selective, keeping position sizes smaller in weaker sectors, and paying close attention to the results of the leading companies, because they are carrying the market. It can also highlight opportunities, as some quality shares get caught in the selling for reasons that have little to do with their own business.
Common mistakes
The common mistake is judging the health of the market only from the headline index. Another is assuming a stock must be cheap because it has fallen a long way while the index is high. Shares in a stealth bear can keep falling, especially if the reason for the selling, such as heavy spending or slowing growth, has not changed.
The bottom line
A stealth bear market is a reminder that an index is an average, and averages can hide a lot. Looking under the bonnet at breadth tells you far more about the real mood of the market. If you want to test how well you read what is happening beneath the headlines, try the free Samuel & Co Trading Trader Assessment.
