Investors have noticed that the stock market has gone through a radical change in the past few months.

Veteran investor Mark D. Cook, who pointed out red flags a year ago, feels vindicated. Finally, stock prices confirmed what he saw in 2014: We’re in a bear market and about to go over the cliff, he says. Here is a chat I had with Cook over the weekend.

Why do you still believe we’re in a bear market?

First, the oil and gas situation is a huge problem, and it will continue. We’re not getting bounces. Instead, oil investors just want to sell. The second problem, and it’s just getting started, is China. China is like an athlete that twisted his ankle and needs time to heal. If the ankle doesn’t heal, it will get worse, and that’s what is happening right now.

Is there anything technical that you are looking at?

Yes. First, every rally in a bear market has no traction. In a bull market, rallies will hold for days or weeks. Now we’re getting sharp “one-day wonders” that fail. Every hope is dashed. That is a strong characteristic of a bear market. Second, the NYSE Tick is registering no institutional activity on the buy side. Every rally is a chance for mutual funds to lighten positions. And this is only January. Wait until people look at their January statements. Many will be shocked.

If this is a bear market, how will investors react in the months ahead?

There are four psychological stages that people go through during a bear market. Right now, investors know the market is struggling but most believe it will come back. In fact, many see this as a buying opportunity. Here are the four stages:

Stage 1: Denial

Right now, we’re in the denial stage. Anyone who is bullish is too stubborn to change his or her view. Many people have their head in the sand, and some may not even look at their January statements. Many believe the market will come back. Right now, many are still buying the dips, which does not work in a bear market. This is similar to what has happened to oil.

Stage 2: High Anxiety

In this stage, many investors are like a deer in the headlights. They are frozen and nervous but don’t do anything. They are told by brokers and financial experts to stay calm and don’t panic. We haven’t reached this stage yet.

Stage 3: Fear

In this stage, the rampant bulls finally realize they are in trouble. If they have bought stocks on margin, they might be getting calls from their broker to add money to losing positions. In this stage, they are watching in fear as their portfolio burns. They reluctantly start to take action as fear increases. Often they say to themselves, “When my stock gets back to even, I will sell.”

Stage 4: Panic

This is what I call the “uncle” stage. This is when panicked investors throw in the towel and take action. They want to get out of the market while they still have something left. At this stage, there is huge downside volume and double-digit declines on the indexes. At the end of Stage 4, many people vow to never buy stocks again. We are not even close to this stage yet. Typically, we hit bottom when investors capitulate after losses of 20% to 50% in their stock portfolios.

Why did you think we were in a bear market a year ago?

The weakening internals told me we were in a bear market but prices hadn’t confirmed it yet. It’s like a vacant building with a gas leak. The longer the leak is undetected, the greater the explosion. If the market had corrected 18 months ago, the coming decline would not be as bad. Unfortunately, central banks around the world interfered with the market and delayed the day of reckoning.

Can the Federal Reserve do anything?

The Fed is losing credibility quickly. They had their 15 minutes of fame and their days have passed. If they announce QE [quantitative easing], people will throw rotten tomatoes at them. The Fed doesn’t have many bullets left in its chamber. When they do shoot, it will be more like a BB gun when they really need a cannon.

What should investors do?

There are three actions they can take but they probably won’t take any of them.

1. Go to 100% cash. Their portfolios are already on fire so they need to go out and save it. This is the simplest solution in a bear market. Don’t forget that bear markets typically last from 12 to 36 months, so there is still time to minimize damage. As one character in the movie “Margin Call” said: “If you are first out the door, it is not panicking.”

2. Investors can play defense by hedging. This means buying a non-leveraged inverse ETF to reduce pain in case the indexes plunge. You can also buy put options to hedge against individual stocks.

3. For a small minority, they can learn how to trade in a bear environment. This includes shorting strategies such as buying inverse ETFs and put options. Bear markets are usually the most lucrative environments for active traders.

Any final comments?

Bear markets are nothing like bull markets. The buy-on-the-dip strategy that worked in a bull market does not work in bear markets. Bull markets are slow-moving and methodical, and you may get many days in a row that are green. Bear markets, however, are violent and volatile. You can short-sell almost every rally. Rallies are short-lived while the declines last longer. In a bear market, nearly every buy-on-the-dip purchase turns red. In a bear market, there is absolutely no stock or individual portfolio that is impervious to the pain of being long.

Michael Sincere is the author of “Understanding Options,” “Understanding Stocks,” and “Prepare Now and Survive the Coming Bear Market,” written with coauthor Mark D. Cook.