The Bull and the Bear! Two formidable creatures and images of strength and ferocity. The characteristics of each of the animals are often used to describe the behavior of the market.
A Bear Market describes a prolonged downturn; named for the bear’s lethal attack method of striking downwards with his powerful paws. The bull, on the other hand, strikes his opponent with his horns, sending it upwards. Therefore a Bull Market describes steady upward movement in the market. Moreover, the bull inspires optimism, and a desire to invest heavily. But the bear is a lumbering figure, gorging himself, and then preparing for hibernation.
There is a lot of important information to be gained from studying both the bears and the bulls in the market place. One important thing to remember is that bears happen to good stocks too. So, let’s have a look at what is going on in these markets.
Basics of a Bull
- A bull market occurs when markets shares rise continuously.
- The increase is measured at about 20% on top of the recovery from the low of the bear market.
- To profit off bull markets, traders use strategies like increased buy and hold and retracement.
Basics of a Bear
- Bear markets see a fall of 20% or more
- The drop increases pessimism and negative investor sentiments
- Bear markets can be cyclical, which means they are shorter lived following a bubble burst.
- Bears can be secular, which means that they last for many years or several decades.
- Strategies for investors to manage bear markets are short selling or put options.
In some ways, bulls and bears are two sides of the same coin, as they tend to follow one another, each taking their turn. A bull market is often the result of economic expansion and optimism in the markets as a whole. While bears are part of the contraction that follows peaks and bubbles in the market. Both animals have their rightful place in the market. They are a reminder that investors are plagued with the inevitable highs and lows of the stock market.
Here are a few concepts that this article covers to compare bear v. bull markets:
- Secular Markets
- The Speculator
- Buy and Hold
- Short Selling
- Put Options
Secular markets last anywhere from 5 to 25 years. They are the result of combining economic forces that cause the price of assets to rise or fall for an extended period of time. Secular markets can be either bullish or bearish, but both occur as a long-term phenomenon.
A secular bull market occurs when there are positive market conditions. Such conditions are things like low-interest rates and strong corporate earnings. To contrast, in a secular bear market is when for an extended period of time stocks are being readily sold, and prices are low. This can be the result of low corporate earnings, or a stagnant economy.
Capitulation is often the result of a market correction or a bear market that leads to a panic sell, or capitulation. It is what happens when investors sell their holdings at a loss during a steady market decline. This can happen at any time, however, it is often suggestive of bear market activity. Investors just want to cut their losses, and take what they can get, while they can get it.
Speculation is another major part of trading. This is simply using the available strategies and information in an effort to anticipate market trends. It is often the strategy of an optimist, as it is a move that takes on the risks of the market place head on, hoping that the investor’s hunch will pay off.
A Bull Market
Bull Markets are characteristic of optimism and investor confidence. A bull market refers to increased value in the stock market. But it could be referring to any increase: bonds, real estate, currencies, commodities, not just the stock market. These bulls usually appear when the economy as a whole is strong and GDP is rising as a result of a burgeoning industry.
Even good stocks and securities fluctuate in the market, so “bull market” is specific to extended periods of rising prices for a large portion of stock. It is usually about a 20% rise after a previous 20% drop. So a bull is reserved for very significant and steady gains in the market. However, there is not a specific metric to measure a bull. It is also not really possible to predict a bull market, so a stock is referred to a bullish only after the fact.
Bull Market History
Likely the most prolific bull market was the dot-com bubble of 2000-2001. Between 1995-2000, among other market gains, the Nasdaq Composite stock market rose 400%. But the bulls were in the market post World War I between 1925-1929 and 1953-1957 following World War II saw similar growth. Then again the period of 1993-1997 saw soaring profits as oil flooded the markets.
Bull Investment Strategies
Buy and Hold: If an investor is particularly optimistic about a security or asset in a bull market, then holding is a wise strategy. It is the simple strategy of holding onto a rising stock or security, waiting to sell them at a later date, and ideally with greater returns then selling at an earlier date. This is necessarily an optimistic move and suggests that the market will continue to show improved values.
Retracement: Even when stock prices are strong and on the up in a bull market, prices often experience a period of reversed value, this is called retracement. These are typically shorter periods of small dips. Investors can watch for the retracement (the dip) in a bull market, and buy when the stock has a lower market value. To buy during a retracement implies an optimism that the stock will recover and continue to increase in value.
A Bear Market
One of the real problems with bear markets is that it is hard to tell exactly how long they will last. A bear market is a drop of 20% for anywhere from a few months to several years. This drop is different from a “correction,” which is only about 10-20% and is short lived. A correction is a small, short drop off in price and can happen after a high or an all-time high.
However, bears are often the result of an overall weakened economy. While they are lean times for investors and the economy alike, bears are also cyclical, and just as much a part of the ebb and flow of the market as the bull. For example, 1900 and 2018 had 33 bear markets, which averages to one bear every 3.5 years.
Unfortunately for everyone, bear markets are usually the result of the following market maladies: low employment, pessimistic investors, low disposable income, weak productivity, and decreased business profits.
These stagnant markets can also be triggered by government intervention. In this case, tax rates or federal funds interferes with the laissez-faire attitudes of the market, so stocks and assets do not move as freely. As a result of external forces, a bear market may occur because there is less of a financial incentive to actively participate in buying and trading.
If investors are losing confidence in a security/stock, they will be less going into the market. When investors want to protect themselves from significant losses in a bear market, they start to drop out. Pessimistic investors may also start to liquidate assets and pull out of the market, which further strains the health of the market.
Strategies for Bears: Short Selling and Put Options
One strategy that an investor can use during a bear is short selling with the services of a “short-seller.” Short selling is the strategy of selling borrowed shares and buying them back and at a lower price.
Here’s how that works.
The seller borrows against a falling asset and sells it to the seller to protect themselves from a future price drop. The short seller then sells the asset to back to the buyer at the current market price.
The short seller will profit if the cost of repurchase from the original owner is less than the initial cost of the asset that was sold at the short. However, the short seller loses if the price of the asset rises higher then the original price, and then the buyer actually profits from the return.
Puts are another option for dealing with big bad bears. A put option is a contract that gives the owner the right to sell a stock. However, puts are not obligations to sell. The way this works is that a seller pays the “put seller” a premium which is a lot like buying insurance on the stock.
In this case, the put writer sells the protection plan to the buyer. Within the given time frame, the buyer can decide to buy the stock at the price of the strike or to walk away from the deal. If the buyer walks, then the put writer must buy the stock at the strike price. So, the buyer earns the option to buy the stock or to walk.
Puts are similar to insurance for your car or house. If you think of car insurance, your premiums are based on the value of the car. Then if you have an accident, you do not pay the full price of the accident, but only part of it.
4 Horsemen of The Bear Market
- Significant investor drop-out and liquidation after a period of high prices and investor sentiment.
- Capitulation begins, where after the highs are over investors begin to shed assets as sentiment falls. This is the result of low trading and profits as stock prices take a sharp drop.
- Speculators begin to enter the market, which raises prices and trading volume.
- Finally, stock prices continue a steady decline. But if low prices and increased optimism join forces, the bear can transform into a bull.
History of Bear Markets
As mentioned earlier, over 33 years, there have been many bear markets. Following World War I in 1929, there was a surplus of agricultural production and a decline in steel production. After postwar rebuilding, the economy slowed to a grinding halt as the postwar bubble burst. Arguably the most significant bear market was the Wall Street Crash of 1929. On October 29, 1929, now known as Black Tuesday, investors panicked and liquidated their holdings.
The Dow Jones lost 89% of its industrial capital by 1932 and the Great Depression followed. After a brief return, by 1937-1942 the market took overall hits of around 50%. Naturally, the economy rebuilt itself, but the 70s saw the Energy Crisis between 1973-1982, which contributed to high unemployment in the 80s.
Here are some highlights from the Bull v. Bear Markets from the past century:
- World War I: 1914-1918
- 1925-1929: Bull Market
- 1929-1932: Bear Market
- 1937-1942: Bear Market
- World War II: 1939-145
- 1953-1957: Bull Market
- 1973-1982: Bear Market
- 1993-1997: Bull Market
- Asian financial crisis: 1997
- 2000-2002: Bear Market
The Nature and Cycles of the Market
Describing the market with the caricatures of bulls and bears are just one more way of trying to understand the market behavior. It is easier to mark either course after the fact, as a sufficient amount of number crunching is required. And it is important to remember that bull markets and bear markets are typical and one will follow the other. Either can last for a short time, in what is referred to as cyclical or a long time, which is secular.
This is important to keep in mind as investors are planning investments for the long and short term. The safe bet is to just hang in there, the market recovers after a crash, leaner and ready for new action. And if you stay in there and hold onto valuable assets through the tough times, you will very likely end up on time.
This may not be every investor’s style, some need to take more and greater risks for greater potential gains. That’s just fine. But forewarned is forearmed, and the more you know about the way the markets behave the better off you and your investments will be.
While there is a lot more to understanding the cycles of the market, it is worth noting that nothing happens in a vacuum. The economy is alive with the forces of its environment animating it. That means that world events are going to affect market events. If it is not a bubble bursting or financial crisis, it is a world war or revolution.
Although many investors disapprove of interventionist activity, it is important to note that market debacles like Black Friday of 1929 and the housing bubble burst of 2008 are in large part because of lack of regulatory bodies.
This might be the case for cryptocurrencies as well. As the bull market seems more and more imminently upon us, regulatory bodies will not sit back and watch. It is hard to say exactly how this will turn out, but with more ICOs and IEOs flooding the market and flopping, it is not surprising that more and more governments are swiftly realizing the importance of regulations on digital currencies. The measures are aimed at eliminating fraud and ensuring that there are legal obligations to allow basic transparency.
The Libertarians among us will be very uncomfortable with the new legislation that limits the freedom of the market. However, if history or biology have taught us anything, it is that bulls and bears alike are very hard to control, and once they get going, we are only all too happy to accept help.