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What are Bull and Bear Markets?

A common question I receive is “What is a bull market and a bear market?” Contrary to initial thought these are not just cute names to inoculate something potentially hazardous to your wealth such as investing or trading. The use of bull and bear delineates disparate market environments. Simply put, asset prices go up in a bull market and trend down in a bear market. Defining a bull or bear market always depends on the time frame that one is referencing. It is possible for a market to be in a long-term bull and short-term bear or vice-versa.  In other words, understanding the time frame being analyzed is essential to understanding the implications from market perspective and putting it into action. 

There are several heuristics that can be used to identify bull and bear markets, however no rule holds up perfectly every time. In my opinion, the simplest and easiest way for investors to ascertain the state of the markets is to look at the historical price action. Price data displayed on a simple line chart over a specified time frame will quickly display whether the prices are trending up, down, or sideways. As an aside, a range bound market is typically considered a bear market since there is no sustained price advance (i.e. buying and holding securities does not produce a profit). Adjustable graphs displaying price action are available for free online or you can obtain static charts through traditional business periodicals.

Alternatively, an investor can review economic data, sentiment indicators, fundamentals, perform cycle analysis, some combination of these or use several other information sources to determine the state of a market. The method of determination is not as important as being able to accurately and consistently decide whether a market is in a bull or bear state. This can be done through experimenting with a variety of input data, ultimately picking one that fits best with your perception on how the markets work. For instance, an accountant may be better suited to review fundamental (i.e. financial) market data than economic inputs which may be better suited for use by an economist. Historians may use cycles, quantitatively inclined individuals may use price data, psychologists may use sentiment and so on. To wrap up, bull and bear are commonly used terms in financial media used to describe markets. Knowing the implications of the state of the market can help you as an investor make better financial decisions.

As always, please do not hesitate to ask any questions. Thanks for reading.


JD
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