A broad market index that rises 20 percent or more over at least a two-month period meets the convention in Investor.gov's bull market entry, and a fall of 20 percent or more over that same minimum period meets its bear market entry. Both figures describe a price change that has already been measured. The condition that changes the reading is the reference point: a percentage measured after a fall runs on a smaller base than the percentage measured before it, so a 20 percent drop and a 20 percent rebound do not cancel.

The convention measures an index, not a holding

Investor.gov's market indices entry describes an index as tracking a basket of stocks representing a particular market or economic sector, and names the Dow Jones Industrial Average as an index of 30 blue chip US company stocks, the Standard and Poor's 500 Index, and the Wilshire 5000 Index, which includes most publicly traded US stocks.

Those three baskets hold different numbers of stocks and cross a 20 percent threshold on different days. The subject of a bull or bear sentence is the basket, not a position, and the weighting method decides what moves it: a market-cap-weighted index gives a larger share of its value to the larger companies, while the Dow Jones Industrial Average is price-weighted, so the price per share sets the weight. Two indexes over the same dates are two measurements.

The three numbers inside a 20 percent round trip

Example, using an illustrative index level because no published index sits on round numbers: the index closes at 100, closes at 80 three months later, then closes at 96 three months after that.

  • 100 to 80 is (80 − 100) ÷ 100 = −20.0 percent over three months, which clears the two-month minimum in the bear market entry.
  • 80 to 96 is (96 − 80) ÷ 80 = +20.0 percent, which clears the same minimum in the bull market entry.
  • 100 to 96 is (96 − 100) ÷ 100 = −4.0 percent.

All three statements describe the same three closes. The −20 percent runs on a base of 100 and costs 20 points; the +20 percent runs on a base of 80 and returns 16 points. Closing the round trip at 100 would have taken a 25 percent rise from 80, the arithmetic set out in why a 20 percent loss needs a 25 percent recovery.

A 20 percent day and a 20 percent market are separate rules

The SEC's investor bulletin on market-wide circuit breakers sets three single-day levels against the S&P 500, in force since 4 February 2013: a 7 percent decline is Level 1 and a 13 percent decline is Level 2, each halting trading for 15 minutes when they occur before 3:25 p.m., and a 20 percent decline is Level 3, which halts trading for the remainder of the day. Before 4 February 2013 the levels were 10, 20 and 30 percent and ran off the Dow Jones Industrial Average.

The same bulletin describes limit up-limit down bands on individual stocks, set at 5, 10 or 20 percent around the average price over the preceding five-minute period and doubled during the opening and closing periods. A Level 3 halt and a bear market both carry the figure 20 percent and measure different windows: one trading day against at least two months.

What two closing prices leave out

An end-to-end percentage discards every price between the two dates. FINRA's volatility page puts a figure on one piece of what is missing: a stock with a beta of 1.2 has historically moved 120 percent for every 100 percent move in a benchmark such as the S&P 500, while a beta of 0.85 moved less than the underlying index. Beta scales movement against an index. It does not report the size of the swings, which is the separate reading in a rising market can still be volatile.

Three fields settle what a label means before it goes into a note: the index name, both dates, and whether each price is a closing price or an intraday print. A 20 percent decline measured to an intraday low and a 19 percent decline measured to the close can describe the same session. Comparing market moves on the same basis lists the remaining fields a return figure needs.

Source references

Primary sources used for this guide. Follow the links for the original scope, definitions and conditions.