The stock market can sometimes feel like a gamble – one day you might wake up and find your investment has gone up 5% overnight, then six months later there was an unexpected crash and you lost all of your profits (and then a little)
But what if I told you that this so-called “randomness” is actually a well-studied life cycle that we can predict and incorporate into our trading decisions? If you’ve been here long enough, you couldn’t help but notice that the economy is going through ups and downs, which are known as bull markets and bear markets for our investments.
These two names may seem similar, but trust me, these two phenomena are different worlds. Let’s take a look at what bear and bull markets are, what to expect from them, and how to react to them for maximum profit.
What is a bull market?
If I had to describe the bull market sentiment in five words, it would be like this: let the good times roll. During a bull market, everything looks cloudless – the economy is doing great, stock prices are high, and unemployment is low. What more can you ask for?
Technically, a bull market is defined as the time when prices rise – usually 20% or more. This trend then continues over time, with prices remaining at their highs or continuing to rise; this encourages more investors to join and start buying, fueling a virtuous cycle of continuous price increases.
This is the time that investors see their investments skyrocketing in value and may find more profit opportunities as things are booming. Sounds amazing, right?
Unfortunately, the good times don’t last forever. On average, bull markets last four to 11 years, although they can end in just a few months.
Types of bull markets
When you hear bull markets discussed, chances are they are talking about stock market indices (namely the S&P 500, NASDAQ, or Dow Jones Industrial Average). However, bull markets can occur in markets for all types of investments. Here are the main types:
- Stock bull markets. The three major stock market indices described above tend to move in line with each other and usually rise rapidly when the economy is in good health.
- Gold bull markets… Physical gold, ETFs, and gold stocks often do well when the stock market is in trouble. For example, after a long bull market ended in stocks in 2000, gold moved into a bull market from 2000 to 2011.
- Bullish bond markets. Unlike many other assets, bonds have not experienced this magnitude lately. In fact, they have been in a bull market since the 80s and have never generated negative profits since then (although it may end soon).
- Bullish Forex Markets… It works a little differently as Forex trading is done in pairs. Consequently, one currency can strengthen and be in a bull market, while another weakens and falls into a bull market.
- Secular bull markets. Despite the name, it has nothing to do with religion – secular bull markets describe a scenario of a long-term bull market that encompasses various types of assets.
Another recent development is cryptocurrency bull markets, but since we are still in the early stages of this market, more research needs to be done to better understand them. However, it has recently become clear that bull markets (and bear markets) are a very real phenomenon in the cryptocurrency world – just look at how many highs and lows Bitcoin has had so far.
What is a bear market?
As the saying goes, what rises must go down – and this downward movement is enclosed in bear markets.
The mechanisms here are very similar to the mechanisms of the bull market, except that the opposite is true: prices go down, so more investors sell, which leads to a constant decline in prices. As a result, you can expect slow growth and high unemployment in addition to lower prices.
All of this may seem like a disaster to investors, but it doesn’t have to be – because, like bull markets, bear markets cannot last forever, which means they offer a unique opportunity to make money.
Similar to bull markets, bear markets can occur for all types of investments and types of assets.
Understanding bull and bear markets
Bull and bear markets should not be viewed in isolation – they both form part of the business cycle. During the growth of the economy, the bull market is in full swing; then, upon reaching its peak, it goes into a bear market.
As we discussed, bull and bear markets can refer to any type of investment, asset, or commodity, so at any moment there can be a bull market for cryptocurrencies and a bear market for stocks.
It is also possible that there will be no bear or bull market – sometimes the market is just in motion.
At this point, the curious of you might wonder why exactly these two types of markets have attracted such names. Etymologists believe that the concept of a bear market arose from the adage that it is unwise to “sell the skin of a bear before it catches a bear.” Bearskin has become a symbol for stocks and is linked to the idea that speculators sell stocks in the belief that the price will fall.
The bull image is a little less specific, but it was probably chosen to represent the idea of running to buy in the stock market when prices rise like a bull racing towards a red flag.
Since the eighteenth century, these visualizations have stayed with us.
Real life examples
You don’t have to go back too far in time to find compelling examples of bull and bear markets.
Before the COVID-19 pandemic, we were in the midst of the longest-running bull market in history, from March 2009 to March 2020. During this time, the S&P 500 is up more than 400% – anyone with the courage. invest back in 2009 could already be very rich.
Unfortunately (depending on who you ask), this means there will be a bear market at some point, although no one can say for sure when it will come.
The previous record for the longest bull market was from October 1990 to March 2000.
When it comes to recessions, the best example is the Great Depression. From 1928 to 1932, the Dow Jones fell by about 80%. It has also been declining for four straight years, making it a more sustained fall than any other bear market.
These are both examples of extended bull and bear markets, but we can also see the same trends occurring in the micro. In March 2020, the long-term bull market we enjoyed came to an abrupt end due to the pandemic – and when I say suddenly, I mean suddenly. The collapse from a high to an all-time low on March 23, 2020 occurred in just 33 days, making it the fastest peak-to-low transition on record.
However, it recovered almost as quickly, reaching its previous high just under five months later. This quick recovery was likely because investors were confident that governments were taking the necessary steps to protect their economies from the effects of the pandemic and that the market could thus recover quickly.
How should you react to bull and bear markets?
No matter how well you know a theory, it is useless if you cannot apply it to improve your investment decisions and increase the trader’s profitability.
By now, you should have grasped one thing: you cannot have a bull market without a bear market, and vice versa – they complement each other and are natural, so there is no need to be afraid of lows. After all, there is a good chance that your investment will recover the lost value.
However, the correct response depends on several factors. Most importantly, how is your risk tolerance? If you can’t worry about seeing the value of your investment plummet over time, trying to predict and profit from price movements is probably not for you. You should also consider the time horizon you are investing in – are you trying to make some profit quickly in the short term, or are you more focused on maximizing your profits in a few decades?
As a swing trader, you can learn to spot stocks that might gain in value early in a bull market and sell them as soon as they peak. Easier said than done, yes, but it can be incredibly beneficial.
Alternatively, you may prefer to play it safe by buying stocks that you think have good long-term potential while their prices are low during a bear market, hoping that you will see huge profits later. If you can “weather” (understand?) The lows of the bear market, they can indeed offer a unique opportunity to buy profitable opportunities at low prices.
Feeling optimistic?
A thorough understanding of how bull and bear markets work is one of the best things you can do for yourself as an investor. How do you expect to make above average profits if you do not understand the basic mechanisms that govern the functioning of the stock market?
But one caveat: don’t think that bear and bull markets are easy to predict and use to make money. In retrospect, market trends may appear as clear as day, but are rarely so in the heat of the moment.
That said, whether you decide to take advantage of bearish and bullish market fluctuations or not, at least you will know that the next time you hit a peak or trough, you shouldn’t be too nervous. or despair.
This article originally appeared on Your Money Geek and has been republished with permission.