How do Traders Talk about Markets?

Bull vs Bear

Fundamentally, there are two types of markets that traders concern themselves with—bull and bear markets. Bull and bear are two opposite terms that tell you whether the market is rising or if it’s falling.

What is a Bull Market?

We call a market a bull market when it rises consistently for an extended period of time. So if the NYSE keeps on rising for period of at least two years—we would say that it is a bull market. Investors are very confident in market performance; they’re willing to put up investments in such a market because they feel it’s a safe market that is performing really well.

The Causes of a Bull Market

Bull markets usually show up when the economy’s doing really well. When companies are making profits, investment levels are high and interest levels are low—usually when people start putting up their money in the stock market to take advantage of the rising stock prices. Beyond just the performance of the economy, the resulting confidence and demand stimulus increases market valuation. Common reasons for bull markets are:

  • Strong GDP growth rates
  • High levels of employment
  • Low interest rates
  • Sometimes even lower currency exchange rates might improve investor confidence

What is a Bear Market?

A bear market is the exact opposite of a bull market. We call a market bearish when it has fallen consistently for a period of time, to a point where people just aren’t willing to invest money for fear of higher risks. Usually a market is called bearish when it moves to a point below 20% of its quarterly highs. No one wants to touch the market because they don’t know when this fall will stop and when recovery will take place. Bearish markets usually indicate poor economic performance.

Causes of Bearish Markets

Typically, bearish markets are indicative of poor investor confidence, economic recession/depression and falling stock prices. Specifically, a bearish market is caused by:

  • Massive unemployment
  • Falling GDP
  • High inflation rates
  • High interest rates
  • Falling stock prices

How Long Does Either Type of Market Last?

For a market to be characterized as either bearish or bullish, the conditions need to persist for long periods. You can’t call a market bearish or bullish just because it behaved a certain way for a couple of weeks—the trends must hold for months at a time.

There is no telling how long either type of market lasts—it depends on how the economy performs over any given period and whether the appropriate corrective mechanisms are in place to overcome deteriorating trends.

Deciding on Investments in Either Market Scenario

Investment strategies depend on each investor’s risk profile. Some people are unwilling to invest in choppy markets, while others like to face risk and enjoy huge pay-offs. If you’re looking to make a lot of money, you could become a contrarian investor because it’s a high-risk/high-reward investment approach.

If you’re facing a bull market, you should consider selling your stocks to take advantage of rising prices across the market. Bull markets are typically sellers’ markets where everyone looking to invest in the market and running after all types of stocks in the hopes that they’ll make a lot of money in the market. Odds are that the stocks you’re holding are already up by a significant amount and you should increase your transaction volumes/frequencies to make the most of stock sales.

If you’re in a bear market, you should consider buying premium company stocks that would otherwise be out of your reach in a bull market. You should wait and look out for signs of market recovery to scoop up premium stocks that you can sell later for hefty profits.

However, as we said before—everyone has a different approach to investments, whatever investor strategy you apply, you should take the step depending on your risk profiles. Market moods tell us a lot about how we ought to invest and there are countless strategies out there to help you succeed.

*Reference: - Phil Town