What are bull and bear markets?
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Skilling Writers Team
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- Education
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- Technical Analysis
If you want to start investing in the financial markets you need to understand the meaning of the words ‘Bull’ and ‘Bear’ markets. This is because they describe the major forces at work within the market which can directly affect your portfolio. They are to be found in thousands of articles, press releases and T.V. interviews every year - you probably know their meaning already!
The origin
Let’s clarify these terms. The origin of the terms ‘Bull’ and ‘Bear’ markets are actually somewhat disputed. Some historians believe that Bull and Bear markets were named after the way in which each animal attacks its victim. When a bear attacks, it swings its paws down, hence a ‘Bear’ means a decline in the market. On the other hand, when a bull attacks, it swings it horns up, hence a ‘Bull’ represents an increase of market prices.
Alternatively, some say the origins more likely came from when a bear attacks, it lowers its head to scare its opponent, hence a ‘Bear’ market means a decline in price and a negative sentiment in general. On the other hand, when a bull attacks, it rears its head, hence a ‘Bull’ market representing an increase in the price and positive sentiment. Whatever the origin, the Bull and Bear terms can be applied to anything that is traded, such as bonds, currencies, stocks and commodities!
What are bull and bear markets in trading?
When analysts express opinions about market sentiment or price action, they will often use the terms “bullish” or “bearish”.
A bull market simply means that the market is in an uptrend and prices of the security are expected to rise, reflecting optimism.
In contrast, a bear market is characterised by falling prices, resulting in a downward sloping trendline portraying a pessimistic view of the market trend. This analogy stems from the way in which a bull or a bear would attack or defend itself in the wild.
In this article, the following topics will be discussed:
- Characteristics of a bull market
- Characteristics of a bear market
- How to identify a bull and bear market
Characteristics of a bull market
We can talk about Bull markets when the economy is doing well, unemployment is low, gross domestic product expanding and stock markets are rising (for example). As, in such a scenario, it is only natural that investors would be optimistic, there are typically more buyers than sellers which causes an overall rise in prices.
In a bull market, the buyer aims to buy into the market when prices are low with the intention of benefiting from the upside move and selling at a higher price.
How to identify a bull market
- Rising prices over an extended period.
Bull markets tend to have a longer life-span than bear markets, with the long-term primary uptrend often persisting for a couple of years. - Investor optimism.
The stock market is generally bullish when there is rising confidence and optimism about earnings and growth for a company or an industry. - Positive growth outlook and strong economic conditions.
Strong economic growth is often accompanied by a greater demand for risk assets and an increase in consumer spending. - Prices have recovered by at least 20% from a market bottom.
Although there is no factual rule for identifying a bull market, the most common technical assumption for a bull market would be an increase of 20% or more from the last market bottom. - Higher highs and higher lows are visible on long-term chart frames.
SPX 500 bull market - 2020 - 2022 weekly chart
Chart prepared using TradingView
Characteristics of a bear market:
The opposite scenario, known as a Bear market, is a situation in which the economy might be performing badly and stock prices are falling which causes a general downward spiral so the investors are best described as pessimistic and feel a tendency to sell.
In a bear market, prices would move lower as more sellers enter the market which eventually results in panic selling.
How to identify a bear market
- Prices decline over an extended period.
Bear markets are generally characterised by a rapid decline in prices that usually occurs at a much faster rate than the initial increase. - Investor pessimism.
Investor confidence sours and panic selling occurs. - Negative growth outlook and weakening economic conditions.
Although bear markets will impact asset classes differently, worsening market conditions and an economic contraction are characteristics of a bear market for stocks. - Prices have fallen by at least 20% from a market top.
- Lower highs and lower lows are visible on long-term chart frames.
EUR/USD bear market - July - October 2023
Chart prepared using TradingView
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Of course, none of either example can last forever, and it is almost impossible to predict consistently when the trends will change.
Buyers and sellers
Bull and Bear markets are an easy way of explaining the interaction of buyers and sellers, and to distinguish between the two types of mind-sets in trading, namely bearish (sellers) and bullish (buyers). Bears think prices are going to get worse, while Bulls believe prices will continue going up. The bearish position is called short, and the bullish position is known as a long.
And that’s it. A very simple explanation of two terms that you will hear a lot in your trading career!
| Bull market | Bear market |
|---|---|
| Higher highs and higher lows | Lower highs and lower lows |
| Optimistic growth outlook | Increase in downward momentum |
| Investor confidence | Increase in fear and panic |
| Positive economic conditions | Signs of an economic slowdown or recession |
| 20% increase from the market bottom | 20% decrease from the recent market top |
Not investment advice. Past performance does not guarantee or predict future performance.
