In this blog, we are going to talk about the biggest trends we are seeing in data usage during a bear market.
Well, the types of data that financial experts, app developers, and major quants are buying can be a major leading indicator. It can be helpful to follow data usage trends during such uncertain times.
Whether you are a fintech founder building an app and trying to keep users engaged with the latest trends, starting your own hedge fund, or building software for trading - this blog is for you.
Simply put, a bear market describes a situation where the stock market is in a period of sustained decline. While there is no hard-and-fast rule for what constitutes a bear market, investors typically use a 20% drawdown from the latest peak of an index's high to indicate that we have entered a bear market.
For example, the S&P 500 briefly entered bear market territory on May 19, 2022, after falling from its latest peak of 4,796.56 on January 3, 2022. While the market recovered from the 20% drawdown by the end of the day – closing at 3,900.79 – market conditions have not improved since then. As a result, many investors believe another dip below 3,900 is all but a foregone conclusion.
While both a Bear Market and a Recession have negative economic impacts and are typically associated with one another, there is a distinction between them.
As expressed above, the stock market is deemed to have entered bear market territory when there is an overall decline of 20% from its latest peak. However, the occurrence of a recession is unrelated to the stock market's performance and is generally identified as two consecutive quarters of GDP decline. A reduction in personal income, increases in unemployment, reduced industrial production, and descending sales volume across manufacturing and wholesale-retail sectors are some of the main contributing factors taken into account when measuring the consecutive quarterly decreases in GDP.
Many factors can cause and contribute to the stock market entering a prolonged period of decline and eventually entry into bear market territory.
According to a study performed by First Trust Advisors L.P., from 1942 to the Present, the S&P500 has fallen into bear market territory 14 times. Furthermore, the average bear market duration during these periods lasts roughly 11.3 months, with cumulative losses of -32.1% during the period. While 11.3 months is not an insignificant amount of time, it is the price that investors must pay to reap the compounding rewards the stock market has to offer. Highlighting this point, the same First Trust study shows that preceding bull markets, on average last 4.4 years and are associated with a cumulative 154.9% total return on average. To paraphrase Morgan Housel, volatility and uncertainty are the cost of admission to entering the stock market theme park and reaping the returns associated with these "fees."
Ok, so it’s likely that bear markets can last almost a year, if not more - and, to make matters worse, all of these guys just said they think we’re headed for a recession next:
But hang on, smart investors and founders will see a downturn in the market as an opportunity. Next, we’re going to talk about the 3 biggest trends we are seeing in data consumption during this bear market so that you can capitalize on it.
Fundamental data is the bread and butter of investment and financial data. This is because knowing the basics like a company’s revenue, expenses, debt, and cash flow is critical to most investment strategies.
At Intrinio, this data set includes all 3 financial statements plus hundreds of metrics and ratios (like price to earnings ratio), basic company information (like number of employees & location), reference data, news, notes, sector, industry, and economic data. But the fundamentals of the fundamental data set is what is trending right now. We’re talking the basics of income, cash flow, and the balance sheet.
Why? Investors typically “flock to fundamentals” when the stock market takes a hit. Everyone is tired of overpriced securities, inflated valuations & multiples, inefficient businesses, and bloated metrics.
We’re seeing app developers who might have traditionally focused on tracking stock price movements via charts start to add “fundamentals” pages to their software, because they know users will be searching for these basics in this environment.We’re also seeing systematic investors (like quant and hedge funds) start to pull more of this data so they can start to incorporate fundamental factors into their models.
Keep your eye on this data set if you want to capitalize on the bear market - and remember, you can get started for as little as $200 a month at Intrinio - plus a free trial.
The second area of data usage that has been climbing lately is options data.
Options are a type of derivative product that allow investors to speculate about the volatility of an underlying stock. To trade options, you purchase a contract that allows you to buy or sell the security at a certain price on a certain date. So - options “data” like the kind of data included in Intrinio’s Bronze, Silver & Gold Options packages, typically includes:
This increased usage of options data makes sense during a bear market - options are a great way to hedge against stocks that investors think might tank when things go south. We’re seeing our users building retail trading apps with this data to help the explosion of retail investors hedge during uncertain times. We’re also seeing some of our professional users who might have historically lead with more traditional strategies start to adopt or at least monitor options movement.
Historical or real-time options data can be very quickly and easily integrated into apps, software, websites, or algorithms via API or WebSocket - chat with our team if you want to try it out.
One last pro tip during uncertain times (including bear markets that threaten to turn into recessions), is to pay attention to the whales.
Information arbitrage can be a powerful thing, but you don’t want to be on the wrong side of it. And let’s face it - we are operating in a landscape of asymmetrical information. So, even though there are likely some institutions, CEOs, global leaders, and/or geniuses in their parents' basement who might have more information than you. The good news is that there are several ways of trying to find out what they’re doing with that information.
The first is through institutional holdings data. All institutional investment managers with AUM over $100m are required to file a form called a 13-f with the SEC which discloses the stocks that they hold in their portfolios.
The second is through insider transactions data. Insiders in public companies (like executives or directors) are required to file a “form 3” with the SEC to disclose any ownership they received, and a “form 4” every time they trade the company’s securities. Many data providers (like us at Intrinio) make it easy to digest both institutional holdings and insider transactions data via API, CSV, or any preferred method.
Purchasing it from a data provider ensures quality, timeliness, ease of access, support & most importantly - ensures that this type of data is actually structured, digital & comparable. The third type of data you can use to track the whales during bear markets is unusual options activity. Tracking a data feed like this allows you to see unusually large, if not massive orders of options contracts.
This typically indicates someone or some company that is pretty confident about the direction of a stock. It’s good to be aware of institutional holdings, insider transactions, and unusual options activity during a bear market, and if you are a fintech founder or investment software provider, remember that your customers need to see and track this information as well.
A bear market is a great time to track the whales and integrate these unique data types into your website to keep your customers happy. Ok - now you are up to speed with the latest trends in financial data usage during a bear market. You’re going to want to take a look at all of these data sets if you are an investor yourself or managing a fund or algorithm.
If you are in the fintech space, it would be smart to think about displaying some of this data for your users so they can stay up to speed throughout this wild ride. And remember, you can chat with our team at any time by visiting our website at www.intrinio.com. We’d be happy to learn about what you’re building and set you up with a free trial for one of our data packages. We can’t wait to see what you build!