The Stock Market Is Poised for a Huge Selloff -- Don't Be Fooled by the Recent Rally

NEW YORK (TheStreet) -- Many investors don't understand how bear markets differ from bull markets. You see, bear markets are not mirror images of bull markets. Most people think they can just invert their bull-market strategy by selling high and buying low and be done with it.

But bear markets are a completely different beast. That can be particularly frustrating for investors who recognize that a bull market is ending but don't know how to trade a bear market. Right now is a great time for these investors to learn, though, because the current bear market (which likely began between this May and July, depending on the index) is offering an exit opportunity close to the bear market's start.

As of Friday's close, the S&P 500 was up 8% since Sept. 29. That's a monster short-term rally! If you asked, "Are you more likely to see these sharp rallies during a bull market or a bear market?", most people would probably respond, "during a bull market."

So following are eight things you must know about bear markets that will help you put the current situation in perspective and avoid letting the value of your investment portfolio erode.

1. History tells us that 5%-8% rallies in five to eight days, like the one we've just seen, are about three times more common during bear markets.

2. The sharpest rises on record are often bear bounces to lower highs, which define a bear market: lower highs and lower lows! 

3. Bull markets take money from bears and give it to bulls, while bear markets take money from bulls and bears.          

4. Bulls markets begin slowly, with melt-ups coming in the middle, as investors seek pleasure from prices that have already been rising. The final rally comes on weaker breadth, lighter volume and waning momentum, as cash and margin are already fully deployed, and the crowd assumes it's different this time, continuing to buy without regard for potential pain.

5. Bear markets end in meltdowns, as investors attempt to avoid pain from prices that have already been falling. The final crash arrives after the meltdown is nearly over, as some news items arrive that the selling can be blamed upon.

6. When the market struggles to reach back above previously broken 50- and/or 200- day moving averages, that's a warning of exhaustion.

7. Bulls markets create arrogance. Novice investors believe they are smarter than industry professionals. Retail investors generally buy stocks they know and like if those stocks are already rising, betting that there will always be a "greater fool" willing to pay an even higher price later.

8. Bear markets create evidence that professionals are no smarter than novices.  

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