A bull market is a commonly used expression in the trading world, but it’s also a commonly misunderstood and misused expression, which is why we thought we’d take the opportunity to clear things up. We are going to explain what a bull market is, how it works, and what happens when it turns. We’ll also compare a bull market to a bear market and give you tips on how to stay safe under bearish market conditions.
What’s the Definition of a Bull Market?
A bull market is a positive market trend that stretches over a longer period of time and encourages investors to buy. Traditionally, a bull market is defined by a security or entire market gaining 20 percent in value, usually following a 20 percent price fall and always followed by a 20 percent price fall. This means that a bull market always ends by leveling out and falling back to pre-bull market prices.
The expression bull market was first coined on the stock market which is one of the reasons why you can find the famous Charging Bull on Wall Street in New York. However, these days bull markets can be used to describe any marketplace where securities are traded. Lately, we’ve seen the expression increasingly used to describe the cryptocurrency market, and several commodities have been known to follow bull market tendencies.
Initiating a Bull Market
The reasons behind a bull market are often many, and you can’t pinpoint what initiates the trend. Low unemployment rates, strong GDP, a growing economy, and rising company profits all have an effect on the stock market. These factors usually create overall optimism among investors who then help push the market further by investing more and more.
It’s like a complete circle where the economy does well and companies experience higher sales numbers which encourages people to invest. This makes people feel more comfortable with their money, thus making them spend more which eventually helps the economy even more, and so on.
Experts often say that a bull market is 50 percent actual events and price changes and 50 percent investor psychology and peer pressure.
How to Predict a Bull Market
Can you predict a bull market? Well, people spend their entire professional lives trying to predict bull markets and some seem to be better at it than others. Generally speaking, it’s very hard to predict a bull market for several reasons.
Firstly, a bull market is often not defined or noticeable until it has actually started, and in some cases, it’s not evident until it’s ended. If you follow the actual definition of a bull market and the 20 percent increase, you won’t know that the market is a bull market until it has reached the 20 percent mark and by then it might already be too late to benefit from it.
Another reason why it’s hard to predict bull markets is because of the psychological aspect of it. An economic analyst can analyze the market in terms of price trends and developments and use that data to try and predict when a bull market is starting. This is a skill that anyone can learn. However, learning how to predict the psychology of a large group of people is much harder. Sometimes random events like an unsuspected president taking office can spark optimism that pushes the market even if it doesn’t really have the economic support for it.
Bull Runs and Bullish Behavior
You may have also heard expressions such as ‘bull run’ and ‘bullish’ which both derive from ‘bull market’ but don’t necessarily mean the same thing. A bull run is used to describe a security making an impressive gain. For example, “the Google stock initiated a bull run after the company’s latest earnings call.”
Bullish behavior has a similar meaning and is often used to describe a security which is growing or is showing signs that it has the potential to grow. For example, “Ethereum has been looking bullish over the past few days.”
What’s A Bear Market?
Sooner or later a bull market turns and, as mentioned, a bull market is by definition always followed by a 20 percent price drop. When prices start to fall, investors become pessimistic and as more people sell their securities the market falls even further. This type of market condition is called a bear market and it’s the complete opposite of a bull market. A bear market is often referred to as a market crash and is something investors try to avoid getting stuck in.
In the worst case scenario, a bull market ends in what’s called a bubble where the market becomes so overvalued that it starts to plummet uncontrollably. An example of a recent bubble was the dot-com bubble where the tech industry had been bullish for several years thanks to the internet, before collapsing in the early 2000’s.
The dot-com bull market bubble started growing in 1997 thanks to the mainstream adaptation of the internet, but when the bubble eventually burst, it only took a few weeks for the prices to fall below pre-bull market prices. Many of the involved companies have only recently gotten back to similar levels, and some company stocks are still trading for pre-dot-com bubble prices.
Bear Market Protection
There is no guaranteed protection against a bear market except for selling one’s assets before the market falls. A common trick for stock traders is to switch stocks for gold since the gold market usually thrives when the stock market struggles.