Overview of Bull and Bear market

You must have heard these terms a zillion times Bull and Bear. If you are new to trading or investing then understanding these beasts and staying on the right side of them is key to your success.

A market can go up or go down or move sideways. Bulls and bears are basically those who thrive in a particular market condition and they also try to push the market in their favor ( if they are big enough !)

The terms “bull” and “bear” are often used to describe general sentiment , either of an individual stock or financial asset or the complete market. Investors use the terms “bearish” or “bullish” to describe how they feel about a financial asset or the market.

In general a market or security moving in upward direction is considered to be bullish and market or security moving downward is considered as bearish . Bulls are in charge and push the price up in bullish market. Bears are in charge and push the market down in a bearish market.

What is a bull market ?

A bull market is one where market continues to move in upward direction and makes higher highs again and again. There is a general long term sense of optimism , more jobs are created , GDP is growing , unemployment levels are low.

Investors have confidence that the share prices are going to move further up and hence they keep investing their money in buying. This further moves the stocks or securities up.

We have been practically in a complete bull market for past three decades. Except for brief periods of a year or two the markets have been moving up. You can see that in popular indexes moving up and up significantly. Major global indexes such as S&P500 , Dow Jones , Nifty 50 , Chinese index all indicate the same thing.

These periods of prices moving down in a bull period are known as retracements. Retracements are good for the market and in general the markets make a higher high once the brief downward trend is over.

The term bull market can be used in any timeframe. We looked at charts spanning three decades , which indicated a bull market for long term investors.

If you are a swing trader then you are looking for a upward move over a few days or weeks and if you are a day trader then you are looking for a upward move for a few hours. However these short term upward movements are known as uptrend and the term Bull market is reserved for long term moves.

What is a bear market

Contrary to the bull market a bear market is characterized by market and stock prices moving down continuously. The overall economy is shrinking in size , GDP is going down , most of the companies are not performing well. There is an overall sense of pessimism about the economy.

A bear market is considered to be in when market falls by more than 20% from its previous high value. Though individual stocks have seen bear markets depending upon the company performance, most of the global economies have not tested the bear markets too often in last decades.

In a bear market as the prices start dropping , investors start losing their confidence and they prefer to exit the market. This further perpetuates the downward trend resulting in a fast downward spiral. A bear market is always characterized by a fast move down compared to a bull market where price moves up in staircase format.

This is mainly because fear is a stronger emotion than hope and hence bear markets are very dangerous to invest in. You cannot predict the bottom and you can lose money quickly.

We have seen three main bear markets in recent past. The dotcom bubble burst , subprime crisis and the recent corona virus related crash. However the markets have always recovered so far and made higher hi after each bear market phase.

Characteristics of Bull and Bear markets

The bull and bear phases of the market characterized by contrasting emotions and actions in terms of investors , traders and in general economy participants.

The investor psychology

The investors are optimistic in a bull market , they are hopeful about the future. Investors think prices will go up in future and based on that hope they keep buying the shares. This further pushes the prices up.

The market always goes up on hope that it will reach a higher value in future and hence give more than what was invested. In bull markets investors have the confidence that prices will move up and this results in bulk buying.

On the other hand in case of bear markets the investor want to sit secured with their cash and they want to stay away from market. This results in a sharp fall in the first phase of the bear market followed by a consolidation or slow decline.

Investors are worried about their cash and they prefer to sit out in a bar market resulting in overall less money in the system. This continues to the point where prices again become attractive enough for investors to jump back in and start a new bull market.

Overall economic activity

In a bull market overall economy is growing , unemployment is less , people are willing to spend money , most of the companies are doing good business and are also making capital expenditures to grow further.

Economic activities in bear market are generally low key. Most of the companies are not performing well , GDP is not growing at the required pace or is falling in some cases, there is a lack of demand in the market and people as well as companies are not ready to spend as they are worried about future and they want to preserve the money.

Supply and demand of financial assets

In a bull market, there is strong demand and weak supply for stocks and financial assets. In other words, large number of investors ready to buy stocks but very few are willing to sell them. As a result, share prices go up as investors compete for the available equity.

In bear market ,there are large number of sellers willing to sell the securities but very few buyers. Buyers want to hold on to their cash and loss making investors still in the market wan to get out at any available price. This pushes the prices down and down in bear market.

What causes a bull or bear market?

Well the answer is fairly simple , hope continues to cause a bull market while fear causes the bear market. The hope can be due to any social , political or economical reasons. As long as investors are confident about there money they will keep it invested and will also be ready to invest more.

Increasing participation in equity market by retail investors has also been one of the significant reasons of a bull market as more money comes into the market , demand tends to be higher than supply , pushing the prices up.

On the other hand a bear market is caused by uncertainty. Any social , political , financial , geological or health related uncertainty causes a panic in the market and can trigger a bear market. Investors want to have some amount of certainty about returns to keep the money invested. As soon this certainty goes out a bear market can start.

How to predict a Bull and Bear market?

It is generally easy to predict a bull or bear market when you are in one !! Very few can actually predict a bull or bear market at the start of it. People generally need some concrete indications about turn of events in favor or against to predict the future.

You cannot predict the market bottom and market top. What one can predict is general direction of the market and you should be easily able to determine if you are in a bull or bear market based on the social , economic indicators around you.

Summary

A bull market is associated with overall optimism , growth , higher stock prices. Bullish market lasts long and market generally goes up in staircase manner. Hope is the single key factor behind bull market.

A bear market is associated with negative sentiment , economic downturn , falling stock prices and investors sitting on the sidelines. Fear is the key factor behind bear market.

Bull and bear phase of the market can be traded using technical analysis. Candlestick patterns such as Hammer , Inverted hammer , shooting star can be used as a pert of technical analysis to take trade decisions.