Understanding Bull and Bear Markets
Bulls vs Bears. This struggle between the two is something every stock market investor knows. If these stock market bulls and bears were to start their own band, then the bulls will be good at making bullish music that will ride the upbeat trends. The bears, meanwhile, will balance that out with bearish ballads that will soothe investors when the slow music slows things down.
In case you are wondering whether you will actually see bulls raging on a run and bears attacking all over the place then fear not. There is no actual animal involved. Rather, the names “bull” and “bear” is a symbolic term to describe the way the stock market behaves in different phases.
With so much interest in the stock market these days, there is no place for the bulls or the bears to hide (or to play hide and seek). No matter where they hide, the market will always find them. They cannot escape the investors’ watchful eyes!
Through this article, we hope that you will understand bull and bear markets and be able to keep track of them with the same sort of watchful eyes that an experienced stock market participant has.
First, let us understand where the name bull and bear really came from.
Surely The Bears and Bulls Won’t Come Into My Office, Right?
A bull attacks its opponent by using its horns and thrusting its victim in the air. In the same way, when the stock market is in a strong uptrend or a bull run, it will thrust a lot of the stock up as prices will keep on rising.
When a bear attacks its opponent, it swipes down viciously on its victim. Back in the day, salesmen of bearskin anticipated a fall in the price of the bearskin and closed sale transactions at a specific price even before they had the bearskin inventory in possession. This is very similar to short-selling, one of the classic features of a bear market. So, when bears swipe down, the fall is swift and potentially steep.
Thus, a downtrend was viewed as being attacked by a bear while an uptrend was viewed as being thrust up by a bull. That is how the terms bull market and bear market came into being.
So, in case you were worried whether a bull or bear will barge through your door, then you can breathe easy. Just try not to get attacked by the price volatility in case you end up on the wrong side of the market trend.
The Characteristics of a Bull Market
In a bull market, prices rise. Usually, stocks of all companies (small, mid, and large-cap) tend to rise for the most part. Of course, there will be companies that won’t do well, but in general, the prices rise across market caps.
There is also plenty of positive, feel-good sentiment among the market participants. The economy tends to do well during bull markets, there is capital expenditure happening, businesses grow, and the media reports positive things for the most part.
The broad-based positivity and outperformance across sectors and market cap categories invite broad-based participation from investors. It is a sort of feedback loop where price rises invite more participation which leads to more price rises.
In technical analysis terms, indices start making higher highs and higher lows. Some investors from specific markets have even conducted studies to show that even a randomly selected portfolio of stocks performs well during bull markets.
While that may or may not be true for your specific geography or market, the point being made is that when the tide rises, all the boats in the water also rise.
Valuations of stocks during a bull market also rise. The price-to-earnings ratios begin to head towards historical peak levels (sometimes even exceeding the previous peaks). Bull markets usually coincide with low-interest-rate regimes.
The positivity turns into excitement and then into euphoria. Investors face FOMO or the fear of missing out on the next big wealth-creating stock. Gradually, the bubble bursts, and a bear market makes its way.
The Characteristics of a Bear Market
A bear market happens because prices fall and they continue to fall. Falling prices are not the only criteria of a bear market as a simple pullback during a bull run is also characterized by a slight fall in prices.
However, if the price falls are greater than 20% and if there is a widespread belief that prices will continue to fall, then a bear market is well and truly underway.
During a bear market, there is a sentiment of pessimism and fear. The emotion of fear leads to sharp falls in the prices of stocks and indices. With the falling prices, the sentiment turns negative. The media start reporting everything that is wrong with the economy and how gloomy things can get.
While price-to-earnings ratios of cyclical and other sector stocks fall, defensive sectors tend to do well. Bonds and fixed income can also potentially see higher demand as investors seek refuge from underperforming equities.
News of layoffs starts making its way into mainstream media. Central banks respond to fears of recessions and unemployment by updating their monetary policies. They lower interest rates from high levels in order to stimulate the economy.
What Can Traders and Investors Do In Bull and Bear Markets?
Traders and investors should first accept that bull and bear markets are natural parts of the economic cycle. The goal during a bull market should be to compound capital while the goal during a bear market should be to protect capital.
Market participants should also accept that it is not possible to exactly exit the market at the top of the bull run and enter the market at exactly the bottom of the bear market. However, as long as you are vaguely right with your entries and exits, there are enough returns to be earned.
The key is to recognize that a bull market has begun or that a bear market is in play. If not losing money means sitting out of the market completely, especially in a bear market, then there should be no hesitation in doing that as well. Sitting in cash is not necessarily a bad thing.
In the above article, we explained what a bull and bear market is. We talked about how the names bull and bear came into being and how it is linked to the way the two animals tackle their opponents.
We also listed out multiple characteristics that define bull and bear markets and finally touched upon what investors and traders can do during these two phases of the market cycle.
If you are ready to test yourself in bull and bear market conditions, then opening a new account with Cerus Markets is something you may want to consider. Our 100% welcome bonus offer can make it a win-win deal for you.