What is a bull market? When you’re new to the trading game, a bull market and a bear market might come across as unfamiliar stock market lingo. While there isn’t a universal definition of a bull market, there are a few commonly accepted definitions that are helpful in understanding the term. There are also many standard characteristics that are present during a bull market period.
A few key concepts to take note of regarding a bull market are as follows:
- During a bull market, the price of stocks follow an upward trend.
- A commonly accepted definition of a bull market is when the stock prices increase by 20% following a 20% decline and then witness another 20% decline after the rise.
- There are many different strategies that can be utilized when taking advantage of a bull market including buy and hold and retracement.
What Is a Bull Market?
A bull market can’t be defined with one standard definition. The qualifications of a bull market can change from person to person; however, most individuals view the following definition as acceptable. When stock prices rise 20% following a 20% decline and then another 20% decline follows the rise, it’s considered a bull market.
When a group of stocks in the financial market are currently rising or expected to rise, it is likely a bull market. Most often, the use of the term “bull market” is in regards to the stock market; however, it can technically be in reference to anything that is traded such as the following:
- Real Estate
The stock market is constantly rising and falling, therefore, a bull market typically refers to when a majority of stock prices have been rising for an extended period of time. It’s normal for bull markets to last for anywhere from months to years.
Making Sense of a Bull Market
Investor confidence, optimism, and the expectation of long-term positive results are just a few factors that make up a bull market. Due to these factors, a bull market can be a difficult thing to predict. When evaluating a potential bull market, investors try to determine when the market trends might change. Factors that often influence the trend include speculation and psychological effects. These types of things are hard to analyze so even if all the numbers and analyses are pointing to a potential bull market, investors can’t be certain until it’s current news.
When it comes to making sense of a bull market, it’s important to understand that there isn’t one single metric to use when identifying a bull market just like there isn’t one single definition. However, the commonly accepted definition mentioned previously is also a commonly practiced method of predicting a bull market.
Whenever investors see a situation where the prices of stocks rise 20% following a drop of 20% and then another 20% drop after the rise, they can fairly confidently call it a bull market. While this definition helps to label a bull market, it does not really offer advanced notice or predictability because the only way to recognize this pattern is after it has happened.
It can be helpful to look at past bull markets when trying to understand a present or future bull market. A rather notable previous bull market to look at happened between 2003 and 2007. During this period, the S&P 500 experienced a large increase following a decent decline. Then the financial crisis of 2008 happened causing significant declines. During this period, you can see the decrease, increase, and then decrease pattern quite clearly.
Key Characteristics of a Bull Market
There are a few key characteristics of a bull market that are worth noting. For starters, a bull market typically results while the economy is either already strong or in the process of strengthening.
Usually, investors will notice these three things during a bull market:
- A strong gross domestic product (GDP)
- A drop in unemployment
- A rise in corporate profits
There are other characteristics of a bull market that aren’t as easy to gauge but are still quite evident throughout a bull market period. One that was mentioned previously is investor confidence. Typically, this will grow throughout the time span of a bull market. In addition to and perhaps caused by investor confidence, investors also notice a positive demand for stocks and an overall positive market outlook.
While factors like unemployment and corporate profits are easily quantifiable, the market outlook and demand for stocks is a little more difficult to analyze. When gauging these types of characteristics, investors tend to look at supply and demand. The supply and demand for stocks is constantly fluctuating. Usually, supply will be low while demand is high. For example, investors will be eagerly looking to purchase stocks while not many will be willing to sell. During a bull market, investors are more readily looking to leap into the market in the hopes of making a profit.
Another characteristic of a bull market is high levels of initial public offering (IPO) activity. This tends to happen because companies are able to get greater valuations for their equity. For example, in 2008 and 2009, the activity was low with only 31 and 63 IPOs, respectively. In 2014, there was a total of 275 IPOs which is a much higher activity level.
Bull vs Bear Market
Typically, when discussing a bull market, the opposite term, a bear market, will also come into play. A bear market is determined based on declining prices and an overall pessimistic feel of the market. Many believe that the terms “bull” and “bear” are based on the methods these animals use to attack their enemies. A bull will ram its horns up into the air while a bear swings its paws in a downward motion. Similarly, a bull market characterizes an upward trend while a bear market trends downward.
Bull and bear markets usually go hand-in-hand with the four phases of the economic cycle:
Oftentimes, an economic expansion leads to a bull market. The market will usually see growth even before economic measures like the gross domestic product. Similarly, bear markets typically take place before an economic contraction actually begins.
Taking Advantage of a Bull Market
Although it is difficult to determine the start and end of a bull market, the best way to benefit from it is by purchasing stocks early. This way, investors can take advantage of the climbing prices and then sell them whenever they’ve hit their peak. Usually, any losses from these purchases are minimal and short-term. Following are a few different strategies that investors use during bull market periods:
- Buy and Hold
- Increased Buy and Hold
- Retracement Additions
- Full Swing Trading
While these are trusted strategies, it is important to note that due to the difficulty in predicting a bull market, these methods still involve a certain level of risk.
The buy and hold strategy is one of the most simple investing strategies out there. It focuses on purchasing a specific security and then holding on to it to possibly sell at a later time. In order for this strategy to work, the investor needs to have confidence that the stock prices are going to rise. A bull market is known for its positive tone and investor confidence making this buy and hold approach perfect for the type of market.
The increased buy and hold method is similar to the basic buy and hold strategy except that it requires more risk. For this strategy, the investor will not only hold the stock, but he or she will also add to it for as long as the stock price is increasing. One tactic to this strategy is to purchase an additional set amount of stocks every time the price of the stock rises by a certain amount.
A retracement is defined as a short time span in which the standard trend of a stock’s price changes. While a bull market represents an upward trend, it will still be subject to occasional, short-term fluctuations. Some investors prefer to watch the market and wait for these dips in the upward trend to occur before buying stocks. When the upward trend experiences a short dip, then they make their move to buy. The theory behind the retracement addition method is that, provided the market is truly a bull market, the stock’s price will quickly grow again giving the investor an initial lower purchasing price and a better chance of making a profit.
Full swing trading is considered one of the more aggressive strategies used in an attempt to take advantage of a bull market. When investors use this method, they tend to play highly active roles and utilize various investing techniques such as short-selling. The ultimate goal of using this strategy is to earn the best profit possible by taking advantage of the various shifts that happen throughout the bull market period.
If you’re looking to take advantage of a bull market and earn a profit, be sure to seek some guidance from the experienced team at Raging Bull. Raging Bull offers a multitude of free resources including access to their free trading handbook. If you want to navigate the market successfully, the experts at Raging Bull are the way to go.