A bull vs bear market are something we are all going to have to deal with in our lifetimes. As a trader, it's something you have to get used to.
Further to that point, why are we referring to the stock market like it somehow resembles these scary animals? Well, let me explain. The use of 'bull' and 'bear' to portray market conditions stems from the way these animals attack others.
A bull drives its horns upwards, while a bear will usually swipe its paws towards the ground. Figuratively, these actions denote the movements seen in most markets.
A bull vs bear market describe periods of growth and decline, respectively. While there's no set way to identify either situation, they're usually associated with price fluctuations that span or exceed a 20 percent range. They also coincide with different phases of the macroeconomic cycle.
Specifically, a bull market signifies imminent expansion in the economy. Typically we first see a rise in public confidence and general optimism in the market.
Investor appetite for securities goes up as a result, which in turn leads to a surge in stock prices when supply shrinks. This may happen even before the broader economic indicators such as GDP begin to grow.
Public sentiments aside, bull markets are also the result of a thriving economy. With a flourishing economy, we see high employment and, more significantly, large disposable incomes. A rise in corporate earnings can also usher in a bull market.
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Perhaps the most notable instance of a bull market in stocks is the period between 1990 and 2000. Stock prices rose to a whopping 417%, with just a single correction exceeding ten percentage points.
And with a life of more than a decade, it was twice as long as the average bull run of the post-WWII period. On the flip side, a bear run implies a widespread and sustained downward trend.
Because markets are characterized by cyclical rises and falls (as highlighted earlier), the generally-accepted threshold is a price decline of 20% from a peak, and which lasts for two or more months.
Simply put, it's a downward move for at least 2 months. We have real time stock alerts that we tweet out no matter what the market is doing.
But what causes the decline in the first place? Bear markets are often the result of a weakening economy.
When business profits drop, shareholder earnings take a hit, and so do employment opportunities. The diminishing spending power could force investors to start selling assets, thereby triggering a price fall.
Speaking of, a bear run can also be the result of a speculative bubble. Once people realize that assets are priced higher than they're worth, a massive sell-off is inevitable. Combine that with the general unwillingness to buy, and what you have is a recipe for a market crash.
Such was the case during the dot-com bubble burst, one of the more (in)famous examples of a bear market. Dotcoms - or rather, tech companies- had for years been hyped as sure stock market trading winners.
But as the new millennium dawned in, it became apparent that most of them weren't ever going to break even, let alone make a profit.
And so, share prices of dotcom stocks lost over 80 percent of their value. Elsewhere, delistings and bankruptcies contributed to 13-figure losses on investors' portfolios.
It would take a decade and a half for tech-heavy stock markets to climb back to their pre-2000 peaks.
Sources within the finance industry indicate that bullish runs typically last five years (as noted previously), while downturns last about 1.3 years on average.
Others have further suggested that boom periods exceed their polar opposites in every other respect (frequency of occurrence, degree of change in value, etc). And when you discount a few exceptions, you'll find that the two states tend to leapfrog each other in succession.
That's no surprise, given that nothing lasts forever. Even in the most favorable climate, it's impossible to sustain growth indefinitely.
Likewise, downturns will tend to reverse themselves no matter how rough the ride gets. Check out our online courses to learn how to trade a bull vs bear market.
Conventional wisdom suggests that the best way to profit off stocks is to buy low and sell high. But that's easier said than done.
Markets are notoriously difficult to predict over any horizon. More often than not, bullish and bearish phases are recognized long after they've set in.
Cutting to the chase, you're better off investing whenever you have funds available instead of trying to pinpoint an opportune moment. That requires a smart strategy -- you want to ensure you can survive bearish phases and expand your position when things change for the better.
But let's start with the rosy side of the scale. Investing during a bull run means buying stocks when prices are nearing their highest levels. That does sound hefty, but you can make things easier by taking advantage of short-term price falls.
Your best bet is to focus on high-quality assets (i.e. stocks in firms that have steady sources of revenue and reasonable debt levels). Utility providers and real estate companies are but a couple of examples here.
And so comes the tricky part: Singling out prudent investments in a gloomy market. For starters, take note that a bearish run doesn't affect the fundamentals of any particular organization.
Examining individual companies will allow you to find high-value stocks that have only dropped due to shareholder panic. Just don't put all your eggs in one basket -- spread your holdings across a wide range of sectors to be on the safe side.
This may come as a surprise to you, but money can be made in both a bull vs bear market. Yes, you read that right, both types of markets. Many traders and investors love picking up cheap stocks because they know the market won't stay low forever.
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