Bullish and bearish markets explained

Bullish and bearish markets are two fundamental concepts in the world of trading and investments. But, what do they mean, why are they called bulls and bears and what sets them apart?

Read on to find out how to identify each scenario and which strategy you could use in bullish and bearish markets.

Bullish market definition | What is it?

The term “bull” represents investors who hold an optimistic outlook on the market's future. They believe that the market will exhibit strength and significant increases, which are commonly referred to as bullish trends.

Consequently, a bull symbolises a type of investor who is confident in the market's potential and aims to buy shares with the expectation of making a profit. This positive sentiment naturally drives the market upward and fosters price growth.

Bearish market definition | What is it?

Conversely, the term “bear” is associated with pessimism. It comes into play when investors adopt a more negative perspective on investing and anticipate bearish trends. “Bearish” signifies the bear's opposing sentiment to the bullish market, indicating a period of continuous market declines.

A bear represents the profile of a seller investor who harbours doubts about the market's condition. They wager on downward trends in stock prices to capitalise on them and secure profits.

Bulls vs bears | The origin of the names

Now that we understand what each term signifies, let's explore why they are called “bull” and “bear.”

Why are increasing markets called bullish?

The term “bull” is aptly chosen because it aligns with the upward movement of the markets. Just like a bull charges from below to above, bullish markets experience an upward trajectory. Another interpretation relates to the posture of bulls when they are on all fours, as their necks have an upward angle.

The bullish market is bullish

Why are decreasing markets called bearish?

In contrast, “bear” is associated with market downturns. This name is fitting because, like a bear's claw, market variations during bearish periods move from top to bottom. The posture of bears on all fours, with their necks tilted downward, further reinforces this symbolism.

Bearish market is bear market

Another explanation may also be associated with these terms. Back in the 17th century, bear hunters would sell the bear's skin before actually hunting the bear, much like short positions in trading. They hoped that the price would decrease between the sale and delivery of the bear's skin. This practice led to the term “bear” for those who open positions expecting the market to decline. In the 18th century, the term “bear market” started to be applied to assets sold by traders.

How to approach bullish and bearish markets

Let's explore how to navigate both bullish and bearish markets effectively. To illustrate these concepts, we'll refer to a 15-year chart of the S&P 500, showcasing historical trends.

Bullish Market - Strategies

Bullish market strategies

It's vital to note that historically, bullish markets tend to persist longer than bearish ones. The returns generated during a bull market typically outweigh the losses experienced in a bear market. Keep in mind that the stock market has a natural bullish bias, especially when considering long-term perspectives.

Here are some strategies suitable for bullish markets but also for long-term investment:

  • Investing in stocks (buy & hold): In a bullish market, a common strategy is to buy shares of companies with solid fundamentals and hold them for the long term. Select companies that have a proven track record of performance, competent management and a competitive advantage in the market.
  • Investing in mutual funds and ETFs: ETFs that follow popular indices such as the S&P 500 can be an attractive option. They offer instant diversification and usually have low expense ratios. Research and select ETFs that directly replicate the performance of the world's best indices.
    • 👉 In the following article, you can find the best ETFs to invest in right now.
  • Real estate: Consider investing in real estate during a bull market. Property prices tend to increase, however, if you do not want to expose yourself to such long-term assets, you also have the option of investing in REITs.
  • DCA to increase exposure and take advantage of compounding interest: Dollar Cost Averaging (DCA) involves investing a fixed amount of money in an asset on a regular basis, regardless of its price. This strategy can help reduce the impact of market volatility and accumulate assets over time. In this way, by reinvesting dividends, investors can take advantage of the power of compound interest. This can lead to exponential growth of the investment over time, especially in a bull market where asset prices are increasing.

Bearish market strategies

Bear markets, although shorter, often feature rapid declines, as exemplified during events like the COVID-19 pandemic. When navigating a bear market, you can adopt two different approaches:

  • Conservative investment strategy:
    • DCA: Investors with a long-term outlook often wait for the market turmoil to subside. They seize the opportunity to make additional contributions to their portfolio when they believe fundamentally strong companies are undervalued. This strategy allows for averaging down positions, positioning for capital accumulation at lower price levels, and facilitating easier profit growth when the bull market returns. However, it's essential to note that many investors tend to sell out of fear during bear markets, missing out on subsequent rebounds.
  • Hedging/short-selling strategy
    • A riskier strategy involves gradually liquidating investments as the bearish trend intensifies, with the intention of re-entering the market once it shows signs of a turnaround.
    • Short selling via derivatives/hedging: Some investors with a short-term focus attempt to profit from market declines by engaging in short selling using financial derivatives. However, bear markets are often characterised by rapid and volatile price movements, making this strategy challenging. Investors also use hedging to protect their positions during bearish markets.
    • 👉 Find out what hedging is.

Bullish vs bearish trend following strategy

An alternative approach is to implement a systematic trend-following strategy, reducing emotional involvement in investment decisions. For instance, you can choose to remain bullish in a bullish market when the price of an index, like the S&P 500, is above its 10-month moving average, and exit when it falls below. This approach can help manage emotions and yield more predictable results.

Trend Following in the Market

Bullish and bearish markets: summary

In summary, understanding the dynamics of bullish and bearish markets is pivotal in the world of trading and investment. Bullish markets are characterised by optimism, confidence, and growth, while bearish markets are marked by pessimism and distrust, leading to declining prices. Adapting appropriate strategies for each market scenario is essential for successfully navigating market fluctuations.

FAQs

How can I determine if the market is currently bullish or bearish?

Market sentiment indicators and technical analysis tools can help assess the market's condition. Some common indicators include moving averages, relative strength index (RSI), and investor sentiment surveys. Additionally, financial news and economic data can provide insights into the overall market outlook.

Is it possible to make profits in a bear market?

Yes, it's possible to profit in a bear market, but it requires a different strategy. Investors can employ tactics like short selling, buying inverse ETFs, or focusing on assets that tend to perform well during downturns, such as gold or defensive stocks. It's essential to be cautious and well-informed when trading in bearish conditions.

How long do bull and bear markets typically last?

Bull markets tend to be more extended, lasting for several years. Bear markets are typically shorter but can be intense, often lasting for months. However, the duration and severity can vary widely depending on economic conditions and external factors.

Related Articles