Whether you are an active or passive investor, it is important to fully understand the stock market cycle. Although markets around the world have grown tremendously over time, their growth has not happened in a linear fashion.
The markets alternate between declines and rises. These fluctuations are completely normal. Depending on the magnitude of the movement, these price fluctuations can turn into a bull market or a bear market .
This article is dedicated to the bull market. What exactly is it and what does it tell us? Finally, we will see how to use it wisely.
What is a bull market?
A bull market is a situation in the financial markets where prices are rising or will rise. The term “bull market” is most often used in reference to the stock market but it can also apply to anything tradable such as bonds , currencies and commodities. Since the price of securities constantly rises and falls, the term “bull market” refers to longer periods during which a major portion of prices rises. The duration of a bull market is generally a few years.
What does a bull market tell us?
Optimism and investor confidence reign in this type of market. Often, expectations of strong longer-term results are also part of the characteristics of a bull market. Admittedly, it is difficult to consistently predict when market trends may reverse. This is because speculation and psychological effects can sometimes take over the markets.
There is no universal and specific description to identify a bull market. The most common definition of a bull market is a situation in which stock prices rise 20%, usually after a 20% drop. Since bull markets are difficult to predict, analysts are only able to recognize this phenomenon after it has occurred. The most notable bull market in recent years occurred between 2009 and 2019. During this period, the US index inflated significantly after the 2008 financial crisis. This bull market broke the record for longest bull markets. The bull market was abruptly interrupted by the violent stock market crash caused by the coronavirus crisis.
Factors to decipher
Bull markets usually take shape when the economy is recovering or when it is already strong. This type of market is most often associated with strong gross domestic product, falling unemployment and rising corporate profits. Investor confidence will also tend to increase. There is movement on the side of supply and demand for securities. Supply will be low while demand will be high. Investors are buying stocks with no patience and few are willing to sell. Investors are easily tempted to join a bull market. There is a general increase in IPOs.
Some of these factors are easier to quantify than others. Think about corporate profits and the unemployment rate. These are easily measurable numbers. The mood prevailing in the markets is difficult to measure.
The phases of a bull market
The gain in investor confidence is undoubtedly the main indicator of a bull market. Investor sentiment is often represented by put/call ratios or IPO activity.
Bull markets are composed of 4 phases:
- The first phase begins with low prices, unenthusiastic market sentiment and pessimistic views of future prices.
- During the second phase, business activity increases, stock prices and corporate profits are on the rise, and economic indicators are above average. Investors are becoming increasingly optimistic.
- During the third phase, market indices and securities reach new heights and the volume of transactions continues to swell.
- The last phase is characterized by excessiveness: IPO activities, trading activities and speculation without any moderation. Stock prices are at all-time highs and investors are piling up their gains or they are governing to negative indicators. Result: the bull market crumbles.
A bull market vs a bear market
The opposite of a bull market is a bear market which is characterized by falling prices and a healthy dose of pessimism. The terms “bull” and “bear” are well-known terms in the stock market. They refer to the position of bulls and bears when attacking their enemies or their prey.
The bull market and the bear market often coincide with the economic cycle which consists of four phases: expansion, overheating, recession and recovery. The start of a bull market is often an indicator of economic expansion. Note, the bear market usually begins just before the economic downturn. In a classic recession, there is a decline in the stock market before the drop in GDP.
Investment strategies in a bull market
Investors who want to take advantage of a bull market should buy early to take advantage of rising prices and sell when stocks have peaked. Although it is difficult to predetermine the timing of the bottom and the top, most losses will be minimal and will occur at the same time. In the examples below, we cover some prominent strategies often used by investors during bull markets. Since it is complicated to assess the current state of the market in this period of coronavirus, these strategies are not without risks if you decide to apply them.
Buy and Hold
One of the most common strategies is to buy a security and hold it to sell it later. This strategy requires confidence on the side of the investor. He must believe in the rise in the share price. To apply this strategy in a bull market, you will need to be optimistic.
Buy and hold, la version agressive
The aggressive version of the buy and old strategy is even more risky. The idea is that an investor continues to expand their positions in a particular security as long as the price increases. A common method of expanding positions involves buying a fixed additional amount of stock before each price increase of a pre-determined magnitude. The investor must show discipline and patience. This strategy is suitable for the seasoned investor. A market crash like the one we have witnessed due to the health crisis can have disastrous consequences using this strategy, however, if all goes well then the gains can be enormous.
Buy during corrections
A correction is a fairly short period during which the general price trend of a security is reversed. Even in a bull market, it is almost unlikely that stock prices will only rise. On the contrary, there are always periods, no matter how short, where small price drops are recorded even if the general upward trend continues.
Some investors are on the lookout for corrections that occur in a bull market. As soon as they detect a correction, they take advantage of it and buy stocks. The reasoning is that if the bull market holds up then the price of the security will quickly rise again. Investors can therefore obtain the security of their choice at a reduced price.
Le swing trading
This is perhaps the most aggressive way to try to take advantage of a bull market. Investors who practice swing trading take very active roles using different techniques including short selling to try to get maximum profits. A swing trader will try to buy a security before it makes a bullish move and sell it when a potential correction occurs.