It can be challenging to predict how the future will unfold in an ever-changing and complex investing world. However, by getting familiar with the terms “bull” and “bear”, hence the title, bullish vs bearish, you will better understand how stocks behave, allowing you to make better decisions about your investments.
With this guide, you will learn how each term impacts your investments to feel confident when making a choice.
Investors, pundits, or even the government may have described themselves as “bullish” on a stock, a sector, or the economy as a whole, and it might have left you wondering what that means.
The term “bullish” simply means investors believe that a stock or overall market will rise. This type of investor is known as a bull. The word bullish, however, implies different meanings for short-term and long-term traders.
This term can sometimes be used to describe the stock market or economy. For example, if an economist believes that the stock market will rise in the future, then they have a bullish view of the market.
Investors in bull markets do well to utilize rising prices by purchasing stocks early in the trend (if possible) and then selling them once they’ve hit their peak.
Bull markets exist when prices, typically those of stocks, are generally on the rise. It is important to remember that not every stock will increase, but most equity indexes will do so.
For example, when there is a bull market, one can expect the Dow Jones Industrial Average and the S&P 500 to rise, even though some individual equities and sectors may not. For a market to qualify as a bull market, there is no widely accepted percentage gauge of that rising amount. From December 1987 to March 2000, American stocks experienced their most extended bull market in history.
Bull is a term typically associated with speculative purchases as opposed to general optimism regarding prices and trend lines. In its early days, the expression referred to people who grabbed stocks in the hope they would jump up. Eventually, the term originated to describe an individual who made such an investment, and finally to refer to the belief that prices would rise over time.
There is a disagreement over the origin of this word, but it probably originated as a foil for the term bear. Despite other theories noting the basis of the phrase, this is commonly accepted as the source. One of the most widely reported alternate sources for the term is how bulls attack by sweeping their horns upward in the same direction as optimist investors expect the market to move.
Bearish trends describe downward movements in a particular asset. A bear considers the market is likely to decline. The general term for a market in a long-term downward trend, with continuous price declines, is a bear market.
When the price of securities in a key market index (like the S&P 500) falls by at least 20% over some time, it is termed a bear market. Unlike a correction, when prices go down from 10% to 20% in a short time, this isn’t a dip that will last. Bear markets are trends that cause investors to feel pessimistic about the future outlook of financial markets or parts of financial markets.
The term secular bear market refers to a market that continues for years. There was a 61-month bear market in the United States between March 10, 1937, and April 28, 1942. Between September 3, 1929, and July 8, 1932, the most severe bear market chopped 86% off the market’s value.
Losses are more likely in a bear market since prices decline, and the end is rarely in sight. If you decide to invest hoping for a turnaround, you will probably take a loss first before seeing any positive outcomes. So, most profits are generated through short selling or safer investments, such as fixed-income securities.
During the 18th century, the term bear market originated from both a parable and practice related to the trade of bearskins. During this era, fur traders occasionally sold skins of bears they had not yet caught.
Traders engaged in short selling here, trading in a commodity they didn’t own, hoping the price would drop. In theory, the trader would purchase the bearskin at a discounted price and make money from the transaction when the time came to deliver.
Though this worked occasionally, it often did not succeed. People at the time commonly said things like, “Don’t sell the bear’s skin before catching the bear.” This was meant to discourage speculation and to make promises you couldn’t keep.
The terms gained greater significance among investors and stock traders, who understood that speculation on a downturn arose from the practice. As time went by, investors began to use the term “bear trader” to describe someone who dealt stocks like disreputable fur traders dealt pelts.
Over time, the term bear grew in usage. Rather than referring specifically to short sale traders, investors began calling anyone who anticipated price dips a bear and declining prices an indication of a bear market.
Bullish VS Bearish
Although the price movement of stocks characterizes bull and bear markets, there are some other characteristics that investors should also pay attention to.
- Demand and Supply for Securities
Securities are in high demand in a bull market, while supply is low. As a result, many investors are willing to buy securities, but not so many are eager to sell them. Because investors compete for equity, shares will rise as they compete for the best price.
On the other hand, in a bear market, more people sell than they buy. Share prices drop as a result of low demand and low supply.
- Investing psychology
Due to how individuals perceive and react to the market’s behavior, investor psychology and sentiment play an essential role in the market’s performance. There is a link between investor psychology and the stock market.
Bull markets attract investors who are striving to gain profit.
A bear market is marked by negative sentiment; investors begin to shift their money out of equities and into fixed-income securities, hoping that the stock market will rise sometime in the future. As a result, investor confidence is shaken by the decline in stock prices. This results in investors withholding their money from the market, which has a knock-on effect on prices, with an increase in outflows.
- Change in Economic Activity
The stock market and the economy are tightly intertwined since the companies traded on the exchanges are participants in the economy.
There is a correlation between a weak economy and a bear market. Consumers are not spending enough, so businesses can’t record huge profits. Stock market valuations are affected by this decline in profits.
When the market is bullish, the opposite happens. Purchasing power increases, and people are willing to spend more money. These factors lead to economic growth.
- Monitoring market changes
A market’s long-term performance is more important than just its knee-jerk reaction to a particular event in determining whether it is bullish or bearish. Small movements reflect market corrections or short-term trends. Thus, whether a bull or bear market will occur over a more extended time cannot be determined.
It should be noted, however, that not all long movements in the market are bullish or bearish. Occasionally, a market will get stuck while it searches for direction. The market would be flat in this case as both upward and downward movements would cancel one another out.
Additional Bull and Bear Market Research
Research data shows that it is hard to remain skeptical about the overall trend in the stock market, with Wall Street – and the Dax German Index – on the rise and holding stocks like the French one at near-historic highs.
The Law of Contrary Sentiment has worked in August, as expectations of declines have led to gains.
Although the return of the Taliban to power in Afghanistan has been tremendously surprising and unexpected, investors seem unscathed, remaining in “risk-on” mode.
A new piece of data threatens the uptrend, and that is the fact that we are in the second half of August, when volatility is at its peak (a phenomenon that is likely linked to the low volume), before the worst month of the year mathematically speaking: September.
Wall Street’s worst month for stocks has been September over the last half-century, both on average and even in an index like the S&P500, the bag that always goes up for those who have defended it for that long. A negative average balance is typical for that month.
To say it differently, it is very likely not only to behave worse by declining less than average but for the entire figure to go down.
Short-term concerns are raised about “altitude sickness” after so many revaluations in the year of the leading indices and whether there is any point in hedging some parts of the portfolio or turning around some positions. A statistical prediction becomes self-fulfilling if many investors believe the same thing.
As a whole, 2020 and 2021 were not typical years: the Ibex fell with the most significant drop in the shortest time and Wall Street went down with the shortest downtrend in history, and the virus prevailed over any statistic. While the S&P500 has experienced 48 closes at all-time highs so far in 2021, it’s still being presented as unusually bullish.
The following link describes the daily data of bullish vs bearish intensity, their differences, log-returns, and risk measures for the German market.
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