An Introduction to Bull Markets

An Introduction to Bull Markets

Reading time: 7 minutes

Irrespective of your experience level, you've likely come across the terms 'bull' and 'bear', or 'bullish' and 'bearish’, which respectively describe upward and downward market conditions. Much like a charging bull symbolises strength and momentum, a bull market describes favourable trading conditions where financial markets experience an extended upward trend. Understanding how bull markets work and how you can trade them is indispensable to making good investment decisions, so let's get right into it.

Understanding Bull Markets

A bull market is a market in which investors buy assets rather than sell them because they're confident that the value of their investments will increase, which supports higher prices, as supply is low and demand is high. During bull markets, trading volume and liquidity also tend to increase.

While investors often refer to bull markets in relation to the stock market, you can use the expression 'bull market' to describe long-lasting rising prices in different asset classes such as Indices, Bonds, Commodities, and Cryptocurrency.

Every bull market usually goes through four different phases:

  1. End of the bear market and accumulation of investment positions on assets with current low valuations and a promising future.
  2. Bull market and momentum when market participants are increasingly confident and more active, supporting the upward movement and increasing prices.
  3. Peak and distribution phase when prices reach new highs with increased volume, pushing informed investors to sell their holdings and lock in returns.
  4. Capitulation phase and bear market when most investors believe that the markets have reached a peak and that it might be better to sell, intensifying bearish pressure.

We can quote the popular British investor, banker, and fund manager, Sir John Templeton, to sum up how bull markets happen: 'bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria'.

When Do Bull Markets Happen?

Bull markets typically arise when bullish investors outnumber bearish investors because they collectively express positive and optimistic sentiment about the prospects of global (or local) economic growth. 

A robust or improving economy, mostly characterised by strong GDP, low interest rates, increasing consumer spending and confidence, as well as decreasing unemployment rates, tends to bolster corporate earnings. 

In addition, investors' confidence also increases, which supports investment activity, as a growing number of investors seek to capitalise on the bullish trends in the market.

Bull Markets vs Bear Markets

Bear markets describe an inverse situation of bull markets, where investors are pessimistic about the evolution of the macroeconomic environment that they sell their assets, adding more pressure to the already overly bearish price movement due to an economic downturn.

Similar to how a bull market is described as a price rise of at least 20% since the previous lows, investors believe that a bear market begins when the markets are down 20% since their recent highs. On average, bear markets are shorter than bull markets (less than a year vs a few years), and bull markets are more frequent than bear markets.

Key Historic Bull Markets

Most investors are aware of the various bull markets on Wall Street, particularly with the S&P 500 index, the Dow Jones Industrial Average, and the Nasdaq. This is because the financial markets of the United States are often seen as reliable indicators of what occurs in other markets, especially within developed economies.

Here are three of the most recent and strongest bull markets:

  1. Before the dot-com bubble burst in the early 2000s, when valuations of Internet and technology companies quickly rose, the stock market was supported by an economic boom known as the 'roaring nineties'.
  2. After the Great Recession that occurred between 2007 and 2009 due to the burst of the American real estate bubble - which had worldwide severe economic consequences, stock prices increased from 2009 until 2020 (the longest bull market so far).
  3. After the COVID-19 pandemic market crash that occurred between February and April 2020, the markets strongly rebounded until the end of 2021.

How to Invest in a Bull Market

To take advantage of rising prices during bull markets, you can use a range of financial products depending on your investor profile, risk tolerance, and overall investment strategy.

Some investors prefer individual stocks (especially dividend stocks) or a market index through mutual funds and Exchange-Traded Funds (ETFs). In contrast, others prefer to trade more frequently using Contracts for Difference (CFDs), trading short-term price fluctuations. This leveraged derivative product allows traders and investors to trade the underlying price movement without owning the underlying asset.

CFDs are also popular for swing trading during bull markets, which describes a medium-term trading style followed by active traders trying to capitalise on price movements between swing highs and swing lows within the main bullish trend.

While you usually aim to invest as early as possible in a bull market and sell when prices have reached their peak (even if it is difficult to determine when the peak will happen) through an investment strategy often called 'buy and hold', you should also remember that the stock market can experience varying degrees of volatility. This means that even during bull markets, market corrections or retracements can happen and temporarily negatively impact your holdings. But you can also use these corrections or pullbacks to your advantage by buying assets at a lower price if you still believe that they will keep rising (or you can use financial products like CFDs to hedge your portfolio when prices fall).

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Source - database | Page ID - 37145

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