The rise and fall of investment market movements are called “bull” and “bear”, respectively. The reasons are as direct as the creatures they are based on.
Recently, US equities saw a notable rally, a trend that has been widely recognized as bullish behavior by the market, and some called may be overstretched. The S&P 500, in particular, has shown consistent upward movement, with evidence of a bull market further supported by the short-term moving averages surpassing the long-term moving averages – a buy signal for investors. But how can we distinguish bull from bear markets? Let us discuss briefly.
What are bull and bear markets?
There are several reasons why the bull and bear are used to represent market movements. For one, bulls are thought to be aggressive while bears are somewhat sluggish animals. That may be true in some level, but it is how these two animals move that are more closely used as metaphors.
In a bull market, the overall direction of the stock market is upward—much like how a bull thrusts its thorns up. The market trend is driven by positive economic indicators or fundamentals like strong economic growth, low unemployment rates, and growing investor confidence.
From a technical standpoint, the commonly accepted definition of a bull market is when stock prices rise by 20%. Another simple indicator would be a higher short-term average compared to long term average. This indicator is commonly referred to as the “golden cross” and appears when the long term (200-day) moving average dips below the short term (50-day) average, signaling a chance for a market breakout.
In a bear market, the opposite action happens. The stock market takes a downward turn—the same way a bear that is standing on its hind legs, swings its front paws downwards.
A bear market is a period marked primarily by declining prices. Negative economic indicators such as a slowing economy, increasing unemployment, and dwindling investor confidence contribute to this market trend. Activity wise, bearish markets would have lower short-term averages than long term averages, the opposite of a bull market. During a bear market stock prices tend to fall, prompting a more cautious approach to protect investments.
Although the general trend of bull and bear markets apply to the market as a whole, it is important to note that individual stocks within said market may not comply with these trends, performing differently based on various factors.
The S&P 500 is now in what Wall Street refers to as a bull market, meaning the index has risen 20% or more from its most recent low.
How do we invest under these market conditions?
It is important to note that the perception of bull and bear markets are not always straightforward, and their nuanced implications can vary for investors. Different investment strategies and outcomes can be realized regardless of the market’s position.
Bull markets, typically characterized by rising stock prices and positive investor sentiment, are often associated with wealth creation. However, they can also foster complacency and speculative behavior. Care should be taken to avoid overpaying for stocks and neglecting thorough research, as inflated valuations and potential bubbles may result. Prudent risk management strategies are crucial during bull markets.
Conversely, while bull markets lead to short-term losses, they can present attractive opportunities for long-term investors. Stocks become undervalued during bear markets, offering favorable buying prospects for strategic investors. Acquiring quality assets at discounted prices positions investors for potential significant returns when markets eventually recover.
What are some strategies can investors take advantage?
There are several strategies that investors and traders commonly employ to maneuver under these conditions.
One such strategy for bull markets is buying and holding: This strategy involves purchasing stocks or other assets with the intention of holding them for an extended period, usually years, to benefit from long-term market growth that could materialize as a result of a bullish market. Another strategy for bull markets would be sector rotation. Sectors tend to perform differently in a bull market. Sector rotation involves strategically shifting investments between sectors based on their relative strength and performance, aiming to capitalize on those that are expected to perform well under the current financial landscape.
A multitude of different strategies also exist for bear markets. In global markets such as the New York Stock Exchange (NYSE), London Stock Exchange (LSE), and Hong Kong Stock Exchange (HKSE), an approach that investors use frequently is shorting. Shorting occurs when an investor sells borrowed stocks with the intention of buying them back at a later date. This would allow for capitalization on the downward trend of prices in a market plagued by discounted price positions. Although this strategy is prevalent throughout most global markets, local regulators had raised several concerns including fears of wild price swings.
GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.
RENZO TAN AND MARCO SIY are interns under the Institutional Investors Coverage Division (IICD) of Metrobank. Renzo is currently studying at the University of Massachusetts Amherst, while Marco is studying at Georgetown University’s McDonough School of Business. Both are avid foodies and somewhat entomophobes.