The bull market and the bear market are some of the most common classifications.
Whenever you think of stock markets, a bull market is all that you look forward to.
A mention of a bear market instills fear of severe loss.
So, what exactly is a bull market and bear market?
Is it just about rising indices and declining stock values?
Well, the bull Vs. bear market comparison has many dimensions to it.
A lot of it depends on the relative market positions and the global economy.
Most importantly, your individual investment objectives make a big difference.
Bull Market Definition
Let us start with the basics.
What’s the definition of Bull Market?
In very simple terms, it is a period of sustained gains in the market.
The prices of the various stocks and assets are on the rise.
There is optimism in the market.
Investors are hopeful about a further rise in prices.
Investor confidence and strong corporate performance are unique aspects of this phase.
There is all-round cheer.
Funds continue to flow in, and asset prices keep appreciating.
Confidence is the buzz word in the bull market.
Often the assumption is that the markets won’t go down at all.
Investors keep building position like there is no tomorrow.
Asset prices keep rising in sync with the demand.
Invariably, there is all-round growth and development.
After all, sheer optimism cannot drive prices alone.
If you want to invest in a company, it needs to project some fundamental value too.
The point is how and where you draw this value from.
Well, growth, in this case, becomes the cardinal catalyst.
Growth alone can drive value on a sustained basis.
But, this does not mean any gain in the market is a bull market.
That is perhaps the biggest difference in bear Vs. bull market debate.
The temporary rise can be seen even in a bear market.
Similarly, temporary losses are a reality of bull markets.
But, the overall trend is important.
Let’s take the market trend since the 2008 debacle.
Why will you refer to the last 6-year period as a bull phase?
That is because there has been an incremental value addition.
The markets have seen sustained appreciation in asset prices.
The Story Behind the Term “Bull Market”
But the point is why term this upward movement as a Bull market?
Well, you could have named anything, Tiger Market, Or Eagle market?
They all depict power, upward movement and what not so why the use of ‘Bull.’
Well though there is no clear documentation, there is one basic theory.
Imagine a bull charging forth.
It is stoic, focused and absolutely spot on.
It does not look anywhere but forward.
In many ways, the bull charge in the market also proceeds in a similar manner.
The markets move forward at break-neck speed.
Every asset class gets swept away in this charge.
It includes large caps, small caps, value buys, short-term buys.
Almost any asset that has a value attached is seen heading north.
So, in many ways, this gain is a representation of a bull-charge with its horn held high up.
Perhaps this is how the term bull market came into being.
It is exciting, gripping and overwhelming.
Almost everyone gets drawn in this euphoria.
There is an absolute buoyancy and free spirit with which the markets move up.
This is rather contagious in many ways.
It is almost like one big party across asset classes.
Everyone wants a piece of this non-stop gain cycle.
But then, there is an old law of nature.
Everything that goes up has to come down.
This is where the bull swaps place with the bear.
Why Term Downturn as Bear Market?
So now the question is why term downturn as a bear market?
The bear when attacked, typically, swipes down.
Therefore, whenever the markets head south, it is referred to as a bear phase.
There is another interesting theory about it as well.
In olden times, middlemen used to sell bear skin they were yet to source.
Essentially, it was one of the earliest versions of speculative trade.
In this, the middlemen would assume the future price.
They would sell on the basis of that.
After this, they would hope for a dip in prices at which the trapper would sell.
Meanwhile, the trapper gained from the difference between cost and selling price.
So, the name, in many ways, refers to these bear skin jobbers as well.
But broadly, it is a movement of these two animals.
In olden times, there were many gory events featuring a bull Vs. bear fight.
Perhaps it is this image that led to the eventual representation of bull Vs. bear market.
The Bull and the bear reference to the opposing forces in the market.
In many ways, they are a representation of the two extremes in the market.
Characteristics of Bull vs. Bear Market
Almost every day, we hear references to the bull and the bear forces in the market.
The market direction remains the single biggest factor affecting your portfolio.
But do you realize that the bull Vs. bear market has distinct characteristics?
There are some unique elements in each of these market phases.
A clear understanding of these characteristics is crucial.
Some features undergo a sea change.
In many ways, these are the factors that lead to the eventual value erosion.
But overall, there are common factors too.
For example, emotions are in the extreme.
You either see terrible panic or absolute euphoria.
It is about blind gain or a sharp downward spiral.
In many ways, investors have to be mindful of these changes.
That is the only way you can use these for your own personal profit.
Otherwise, you run the risk of getting swept by the overall market forces.
Supply-Demand Matrix in Bull vs. Bear Market Phase
This is one of the most pronounced triggers for extreme market movement.
In a bull market, demand for equities is stronger than supply.
This means that on an average, more people are willing to buy the security.
However, supply is significantly lesser as people are not so keen on selling it.
This higher demand results in prices escalating higher.
As you would have expected, the reverse happens in case of a bear market.
There is a huge amount of supply but not many ready to buy.
As a result, the share prices drop to a large extent.
So, when you are defining the bull market, you can pretty much consider it demand driven.
You must remember, the demand is not just for equities.
Demand is considered as the generic mirror for consumer sentiment.
Do people have the spending power to service this demand?
That is what is crucial.
Remember, it is this additional buying power that can lead to better demand.
It can serve the consumer needs and create a high demand scenario.
Therefore this basic law in economics becomes the backbone of most market moves.
Understanding Investor Psychology
Well, when you are trying to analyze the characteristics of a market, this is important.
The investor psychology actually triggers the final buy.
In fact, the market’s behavior is distinctly dictated by investor behavior.
The way individuals perceive the market movement impact stock prices.
Actually, both these factors are mutually dependent.
Let me explain with an example.
When you are in a bull market, everyone is ready to participate.
Everyone wants to earn a profit.
They are all okay with even putting all their eggs in one basket.
The concept is irrespective of the extent of gains, people participate.
This is because of the buoyant investor psychology.
At the same time, the buoyancy in the investment environment drives investment.
Just the reverse happens in case of a bear market.
The market sentiment is completely negative.
Investors are more keen to withdraw money from the market.
So on the one hand, investor confidence begins to wane.
On the other hand, the negative returns result in low investor interest.
As the stock prices decline, there is also widespread panic in the market.
People look for an exit route out of the market.
On the other hand, this gradual decline forces people to reduce positions.
Therefore, the investor psychology is often the deciding factor.
It can, in many ways, help you take a call on the trend.
The Economic Cycle
The bull and the bear market are cyclical in nature.
What I mean is, neither bear market and nor the bull market will continue forever.
Often the existing economic conditions play a key role in determining the trend.
Let us look at a bull market situation.
Typically, the consumers are spending a lot in the phase.
Now when can consumers spend a lot?
Only when they have surplus money.
Well, that can happen only when the economy is doing good.
The overall growth parameters are buzzing and the businesses record strong profit.
The spending, in turn, also strengthens the economy.
This, therefore, becomes a symbiotic correlation fueling long-term growth.
Now the exact opposite happens in case of a bear market.
Investor sentiment is really low.
This is predominantly due to weakness in the economy.
Be it deflation, stagnation or recession; they weigh on consumer sentiment.
Consumers never spend adequately around these periods.
As a result, there is an all-round sense of gloom and caution.
That goes a long way toward further destabilizing the core of the economy.
The bear market invariably continues as long as the slowdown does.
A revival in the economy is almost always connected with a revival in markets.
This, therefore, has a direct bearing on the way markets behave.
Conversely, market behavior is closely linked with economic health.
The economy of a country primarily drives all investment activity.
Similar, during the recession, investors are wary of aggressive savings.
You see a spike in safe haven investing.
Everyone is scurrying around for cover.
Your primary responsibility at this stage shifts.
You are not looking at growing money at that point.
The bigger priority then is about limiting losses.
Ways to Gauge the Market Trend
Now, let’s face it, the market change does not happen overnight.
But most times investors fail to pay heed to the initial signs.
But, when there is a sudden sharp fall or a massive gain, investors are taken by surprise.
You need to keep in mind that any knee-jerk reaction cannot determine a trend.
The market trend is determined by several long-term factors.
In fact, a small movement could also be a correction in the long-term trend.
This is exactly why it is important to understand how to gauge the market trend?
The bear Vs. bull market difference can be ascertained by the degree of change.
So, if there is a distinct 15-20% correction in any direction, it shows a change.
It could be a start of the bull market phase or bear market condition.
It is about how prepared you are.
For example, if you can gauge the start of a bull market, you can buy at lower levels.
Similarly, you can get much higher rates if you sell anticipating a bear phase.
This means an in-depth understanding of the market is crucial.
Moreover, you need to be careful about anticipating the change in trend.
In this context, you must remember not every correction is a bear market.
Nor does a bull market start with every rise in the market.
That apart, there are several phases of rangebound or no growth in the markets as well.
There is an absolute sense of sluggishness or stagnation in the markets.
Series of ups and downs will only cancel out the eventual result.
The difference between a bull market and bear market is sustained.
Mere flattening out of loss or gain phase cannot be an adequate indicator.
Look out for long-term developments.
That is where you will get the real signals.
Changes in Investment Strategy in Bull vs. Bear Market
The difference between bull and bear market is best borne out in strategy.
The bull market is all about widespread optimism.
In contrast, the bear market is about extreme pessimism.
As a result, a bear market is clearly denoted by short positions.
Taking well-calculated shorts is undeniably the biggest indicator of bear phase.
In contrast, long positions are the most definitive indicator of bull charge.
The liquidity is relatively high in case of bull phase.
In contrast, the bear phase is marked by low liquidity.
So you will sell stocks in one situation and buy in another.
It is possible to clock gains in both bear and bull markets.
The question is almost always about adopting the right strategy.
This is why shorting is one of the best ways to gain in a falling market.
Rising markets typically attract buyers.
That’s why you will see a plethora of long positions.
Investors are invariably drawn towards buying more and more in a bull phase.
Typically both these phases are preceded by a correction.
The correction is generally recouping of prices to fair value levels.
Stocks can be in overbought zone or oversold areas.
The bear market tends to close in quickly and then flatten out.
You must always remember the 2001 crash or the 2007-2008 decline.
However, in contrast, the bull phase stays for a long period.
It is inevitably gradual, but the extent of gains is huge in a bull market.
Therefore, your bull market strategy can start with cautious optimism.
However, it can soon change into a huge upswing.
Your strategy in bull market needs to be dynamic and definitive.
A bear market strategy is more of a wait-and-watch policy.
There Is a Huge Difference Between a Bull Market and the Bear Market
The definition of the bull market is linked closely to a bull thrusting its horn up.
This is why the characteristic of it is also linked to a bull-charge.
It is a long, exciting upward drive.
The bear market experience is its complete contrast.
Investors have to switch to various modes of savings based on the changing dynamics.
They determine the profit prospects and the means to lock gains.
Typically a 20% plus rise heralds the onset of a bull market.
Investors have to be careful about minor blips in the market.
The short-term moves cannot be a judge of future trends.
However, in this context, investors have to be cautious about bear trap or bull trap.
These are typically short-term blips that convince you the trend has changed.
So, you need to understand the features of a bull market carefully.
Note the subtler differences in bear Vs. bull market trades for sustained gains.