The Bear Doesn't Scare Once You Know Him

By now, you've probably noticed that Ursus venalicium -- which might be the zoological name for "market bear," if he had one -- is upon us in a big way. And as bears go, he's quite a nasty critter.

Officially, our current down market became a bear on July 9, the point at which the S&P 500 was down 20% from last October's all-time high. But it has been pretty clear for a while now that this wasn't just a minor dip in the bull-market road.

When will the bear go back into his cave? Just as with defining the bear market in the first place, we won't know for sure except in retrospect: A bear market is typically said to be over after a 20% rise from the bottom -- but there are exceptions.

For instance, during the vicious bear romp earlier this decade, the market rallied several times, including twice by more than 20% -- only to fall back every time. It wasn't until 2004 that most folks were on board with the idea that the bull was here to stay.

Which leads me to my point: We can't predict the future, but we might get some ideas about what to expect by looking at the past. As it turns out, past bear markets share some distinguishing characteristics, and odds are good that this one will too.

Classifying the species
Doug Short, an analyst for the Fool's Rule Your Retirement newsletter, recently compiled an interesting chart comparing key data points from the eight bull markets (not counting this one) since 1950. I'll refer you to his article for the full picture -- it's in the September issue of Rule Your Retirement; click here for 30 days of free access -- but it's worth summarizing a few key points here.

If we exclude the two most extreme bears -- the grinder of 1973-1974 and the dot-bomb bear of 2001-2003 -- some fairly consistent patterns emerge. The total market declines from top to bottom ranged from 21.5% to 36.1%. Yet while the typical length of bear markets ranged from just over three months to more than a year and a half, they usually ended within six months after hitting that 20% decline.

Compare with where we are now: about 1.5 months past the 20% marker, almost 11 months of bear-dom so far, and the low point so far (as of this writing) was 22.4% off the high, set on July 15. All of which is right in the historical ranges -- so far, this bear isn't extraordinary by any means.

To sum up, the data tells us two important things:

• So far, this bear looks like a lot of past bears;
• All of those bear markets eventually ended.

Getting past the fear
Does that mean it's time to buy? As I said recently, I've been bargain-hunting, and I've bought a number of stocks for my retirement portfolio -- mostly larger value stocks that I expect to hold for a long time.

I don't know whether the market is going to go lower from here, or whether we're in the first stages of a recovery. I don't know whether the much-talked-about credit problems in the U.S. economy will turn out to be overblown, or whether they'll lead to structural damage that will keep the markets in a slump for years.

I can't predict the future with certainty. If I could, I'd be running one heck of a hedge fund. But what I can do is look at past market patterns, which tell me that this is a time to buy good stocks cheap, and then hunt up some good cheap stocks and buy them.

Taking action
How do we do that? Just now, I ran a simple value screen using the CAPS screening tool and came up with some intriguing possibilities. All of these are currently five-star CAPS picks: 

Data from CAPS as of Aug. 29, 2008.

Are they all great buys? I don't know yet (though there are several Fool analyst favorites on that list), and I suggest that you do some due diligence before making any trades. Nor do I know whether they fit into my overall retirement portfolio strategy, and for me that's an important consideration. But I do know that if you're thinking about putting the bear to work, that list might be a good place to start.