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Bull vs. Bear market: How to invest

At a glance:

  • Bull and bear markets

  • Investing during bull markets

  • Investing during bear markets

  • Predicting bull and bear markets

  • Summary of bull and bear markets

Bull markets are movements in the stock market in which prices are rising and the consensus is that prices will continue moving upward. During this time, economic production is strong and jobs are plentiful. Inflation is low.

Bear markets are the opposite—stock prices are falling, and the view is that they will continue falling. The economy also slows down, and unemployment and inflation rise. In either scenario, people invest as though the trend will continue.

Investors who think and act as though the market will start to rise or keep on rising are said to be bullish, while those who think it will start to fall or continue falling are bearish. As an educated investor, you need to be aware of the market sentiment and make investment decisions accordingly.

Bull and bear markets

What causes bull markets and bear markets?

They are partly a result of the supply and demand for securities. Investor psychology, government involvement aimed at prodding or suppressing economic activity, and changes in economic activity also drive the market up or down. These forces combine to make investors bid higher and higher (or lower and lower) prices for stocks.

How does a market qualify as a bull or bear?

To qualify as a bull or bear market, a market must have been moving in its current direction (by about 20 percent of its value) for a sustained period. Small short-term movements lasting days do not qualify; they may only indicate corrections or short-lived movements. Bulls and bears signify long movements of significant proportion.

Famous bulls and bears in history

There are several well-known bulls and bears in American history. The longest-lived bull market in US history is the one that started in 2009 and is currently in progress, as of late 2019.

Other major bull markets occurred in the 1920s, the 1950s, the late 1960s, the mid-1980s, most of the 1990s, and the mid-2000s. However, they all ended in recessions or market crashes.

The best-known bear market in the United States was, of course, the Great Depression. The Dow Jones Industrial Average lost roughly 90 percent of its value during the first three years of this period.

There were also numerous others throughout the twentieth century, including those of 1973–74 and 1981–82. The twenty-first century had a bear market from 2000 to 2002 and again from 2007 to 2009.

Investing during bull markets

A key to successful investing during a bull market is to take advantage of the rising prices.

Buying low and selling high

For most, this means buying securities early, watching them rise in value, and then selling them when they reach a high. However, as simple as it sounds, this practice involves timing the market. Since no one knows exactly when the market will begin its climb or reach its peak, virtually no one can time the market perfectly.

Often investors attempt to buy securities as they demonstrate a strong and steady rise and sell them as the market begins a strong move downward.

The advantage of a stock-heavy portfolio

Portfolios with larger percentages of stocks can work well when the market is moving upward. Investors who believe in watching the market will buy and sell accordingly to change their portfolios.

Using risk to your advantage

Speculators and risk-takers can fare relatively well in bull markets. They believe they can make profits from rising prices, so they buy stocks, options, futures, and currencies they believe will gain value. Growth is what most bull investors seek.

Investing during bear markets

Successful investing in bear markets can involve many different strategies. Some investors try to secure their assets in less-volatile securities such as fixed-income bonds or money market securities. Others wait for the downward trend of prices to subside.

When investors start buying

When it does, they begin buying. Still others seek to take advantage of the falling prices. When the market goes down, portfolios with a greater percentage of bonds and cash fare well because their returns are fixed. Many financial advisors emphasize the value of fixed-income and cash equivalent investments during market downturns.

Another strategy is to simply wait for the downward prices to reverse themselves.

Defensive stocks have an advantage in bear markets

Investors who wish to remain invested in stocks may seek out companies in industries that perform well in both bull and bear markets—shares in these companies are called defensive stocks. The food industry, utilities, debt collection, and telecommunications are popular defensive stocks.

However, as with any investment choice, there is no guarantee that a defensive stock will perform well during any market period.

A trader works on the floor of the New York Stock Exchange in New York. (Photo: AP Photo/Jin Lee, File)
A trader works on the floor of the New York Stock Exchange in New York. (Photo: AP Photo/Jin Lee, File)

Timing the market

Finally, some investors attempt to exploit profits from the downward price movements. One method is to sell at the beginning of a downward turn, when prices are still high. Proponents of this strategy wait for prices to bottom out.

However, as simple as it sounds, this process involves timing the market—a task that no mere mortal has demonstrated he or she can do consistently.

Selling short when prices are falling

Another, more complicated way to attempt to profit from falling prices is called selling short. Selling short occurs when you "borrow" a security from your broker and sell it with the intent of re-purchasing it in the future to repay the loan. You might sell short if you believe the price of a security is going to drop significantly and you could re-purchase it at a price significantly below the price for which you sold it.

Predicting bull and bear markets

Investors turn to market theories and complex calculations to figure out in advance when the market will scream upward or tumble downward.

They are seeking the perfect market indicator into which they can put their numbers and await a neatly packed reply. In reality, however, no perfect indicator has been found.

Using technical analysis to predict the market

In their attempts to predict the market, economists use technical analysis. Technical analysis is the use of market data to analyze individual stocks and the market as a whole. It is based on the ideas that supply and demand determine stock prices and that prices, in turn, also reflect the moods of investors.

How the advance-decline line works

One tool commonly used in technical analysis is the advance-decline line, which measures the difference between the number of stocks advancing in price and the number declining in price. Each day a "net advance" is determined by subtracting total declines from total advances. This total, when taken over time, makes up the advance-decline line, which analysts use to forecast market trends.

Generally, the A/D line moves up or down with the Dow. However, economists have noted that when the line declines while the Dow is moving upward, it indicates that the market is probably going to change direction and decline as well.

Summary bull and bear markets

There are many investment methods that seasoned investment professionals use to take advantage of opportunities during bull or bear markets.

Methods such as dollar cost averaging, selling short, and diversification exist. Understanding well-founded strategies will help you to improve your chances for superior performance in either market environment.

However, there is no surefire way to always succeed. The best weapon you can employ is education. Do your homework!

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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