Adapting to Bulls and Bears

Bulls and Bears not only describe the volatile market conditions, they define them too! Bulls and Bears buzz around the trading world, raising the hopes of traders as well as destroying their mood! But what do they actually mean?

Well, they describe market movement, whether stocks and/ or currencies are appreciating or depreciating in value.

They also reflect the attitude of the investor, denoting an ensuing market trend.

A bull market refers to a market that is on the rise; witnessing an increase in market share prices. This fact causes a psychological boom installing faith in investors and leading to a positive long term trend. This tends to happen in countries with strong and solid economies with high employment levels.

A bear market causes the opposite psychological effect; it depicts a market in decline with share prices continuously dropping, resulting in a downward trend convincing investors that this negative market deterioration will continue long term, and leading to an inevitable rise in unemployment as employers begin to fire workers.

Characteristics of the Bull and Bear Markets

Although primarily marked by the direction of stocks and currencies, the Bull and Bear markets respond to other characteristics which investors should be made aware of. The following factors are affected by both market types:

Supply and Demand for Securities – the bull market showcases a strong demand and weak supply for securities. Some investors buy securities while a few sell. As a result, share prices rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply and, as a result, share prices drop dramatically.

Investor Psychology – the market’s behaviour is determined by how individuals perceive market trend and investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, sentiment is positive and investors are optimistic about the market trend; in a bear market, on the other hand, market sentiment is negative as investors begin to move their money out of equities and into fixed-income securities until there is a positive move. In sum, a decline in stock market prices shakes investor confidence, causing investors to keep their money out of the market – which, in turn, causes the decline in the stock market.

Change in Economic Activity- it is a fact that the stock markets and the economy are closely connected. A bear market reflects a weak economy as purchasing power is low. The decline in profits directly affects the way the market values stocks. The bull market reflects the reverse situation, as people’s purchasing power is increased and they are willing to spend, strengthening the economy.

How to Gauge Market Changes
What determines whether the market is bull or bear? An answer could be the long-term trend, not just the market’s knee-jerk reactions to particular events. These small sudden movements reflect a short-term trend.

Not all long movements in the market can be characterized as bull or bear. Sometimes a market may go through a period of stagnation as it tries to find direction. In this case, a series of up and downward movements would actually cancel-out gains and losses resulting in a flat market trend.

How do we deal with the Bull and Bear markets?
In a bull market, the investor should take advantage of rising prices by buying early in the trend and then selling them when they have reached their peak. (Of course, determining exactly when the bottom and the peak will occur is impossible.) On the whole, when investors have a tendency to believe that the market will rise (thus being bullish), they are more likely to make profits in a bull market. As prices are on the rise, any losses should be minor and temporary. During the bull market, an investor can actively and confidently invest in more equity with a higher probability of making a return.

In a bear market, however, the chances of losses are greater as prices are continually losing value and the end is not often in sight. Even if you do decide to invest with the hope of an upturn, you are likely to experience a loss before any turnaround occurs. Thus, most of the profitability will be found in short selling or safer investments such as fixed-income securities. An investor may also turn to defensive stocks, with performances minimally affecting the changing trends in the market, making them stable in both economic gloom and boom. These are industries such as utilities, which are often state-owned and are necessities that people buy regardless of the economic condition.

Conclusion
There is no sure way to predict market trends, so investors should invest their money based on the quality of the investments. At the same time, however, you should have an understanding of long-term market trends from a historical perspective. Because both Bear and Bull markets will have a large influence over your investments, do take the time to determine what the market is doing when you are making an investment decision. Remember though, in the long term, the market has posted a positive return.