Understanding market trends is essential for profitably trading stocks and currencies. While the performance of individual stocks heavily depends on the fundamental factors driving publicly traded companies and their related industries, general market sentiment also plays a major role in the performance of the stock market and forex markets. Here is what you need to know about bullish vs bearish market trends.
What is a Bullish Market?
A bullish market trend is when the economy is on an upswing. With favorable economic conditions spurring growth, both stocks and currencies tend to chart upward during this period. In a bull market, traders typically assume prices will rise in the upcoming months so they buy assets (assume a long position). These assets are generally held until the market reaches its peak and then are sold at a profit.
Strong economic performance is the primary driver of a bull market, triggering consumer spending and demand for investment opportunities. High-growth stocks and currencies perform the best during this period, as the fastest-growing companies and economies thrive.
Trading in a Bullish Market
After understanding the bullish meaning, take a look at how to trade in a bull market. The rule of thumb for investing when the markets are bullish is to buy low and sell high. Bull traders buy a stock or asset at a discounted price and sell it at its peak, booking profits on the investment.
As bull markets are characterized by strong economic growth and high investment demand, high-growth stocks tend to perform well. However, bull markets often cause even speculative low-value assets to appear appealing, which can result in immense losses for traders. Fundamentally analyzing assets to identify unsystematic risk is crucial in a bull market.
What is a Bearish Market?
A bear market is when economic parameters and securities are in a downtrend. A worsening economic scenario, falling stock prices and depreciating currency values are typically witnessed in a bearish market as the economy slows down. A market is said to have entered bear market territory if asset prices fall at least 20% from their recent high.
As the market sentiment is negative, investors usually engage in short selling or avoid major investments during such periods.
Trading in a Bearish Market
Take a look at the bearish meaning, and how to trade in a bear market. One important thing to note is that a bearish market is different from a market correction. A greater than or equal to a 10% decline in asset prices indicates a market correction, while a greater than 20% fall indicates the beginning of a bearish market trend.
The market sentiment is pessimistic in a bear market, as investors expect asset prices to decline further. The most common investment strategy is short selling — when investors borrow securities through their brokers to sell in the market and later buy them back to return them. As traders expect the prices to plummet, they sell it at a particular price and buy it back when the value falls further, pocketing the difference.
Investors also buy high-dividend-paying defensive stocks, as they remain relatively stable despite market headwinds during a bearish trend. The constant demand for such prices despite the economic conditions allows publicly traded companies to pay dividends regularly, providing passive income for investors.
Elements of Bull vs. Bear Markets
Key differences between bull and bear markets include:
Economic Parameters
Economic variables such as consumer spending, retail sales and gross domestic product (GDP) rise during a bull market, as an economy is at the expansion stage of a business cycle. As both government and private investments pour in, industries perform well, causing stock prices to rise and currencies to appreciate. Unemployment levels fall in a bull market.
The situation is completely reversed in a bear market, as it is characterized by falling GDP levels and retail sales and rising unemployment levels.
Interest Rates
Central banks keep benchmark interest rates low to fuel economic growth and expansion to perpetuate a bull market. Alternatively, bearish markets are delineated by high-interest rates. In order to extend the bull market and prevent a recession, the Federal Reserve kept the federal funds rate at near-zero levels during 2020 and 2021, driving economic growth and sentiment. But to control the raging inflation levels, the U.S. central bank adopted a hawkish monetary policy, which triggered a bear market last year.
Time Period
Bull markets are typically longer than bearish markets. The average U.S. bull market lasts 6.6 years, with the long bullish trend lasting 10.8 years from 2009 to 2019. The average bear market in the U.S., on the other hand, lasts approximately 1.3 years. Governments use various tools to bring a nation out of a slump during bear markets, causing bear markets to be significantly shorter than bullish markets.
Market Sentiment
Investors harbor a positive sentiment regarding market conditions and future trends during a bull market, while a bearish market indicates poor or negative market sentiment. While it is difficult to pinpoint the exact time when a bull or bear market starts or ends, the general investing rule is that a greater than 20% rise in overall asset prices indicates a bullish trend, while a 20% or greater decline reflects a bear market.
Trading Forex in Bullish vs. Bearish Markets
The stock market entered the bear market territory last year, with the S&P 500 and the tech-heavy Nasdaq Composite index registering their worst performances since the Global Financial Crisis of 2008. The S&P 500 index fell more than 20% from its record high in 2021, while Nasdaq declined more than 33% last year. While the indexes have recuperated from last year’s losses, the recessionary concerns could trigger another bearish trend.
Nonetheless, understanding the bullish and bearish markets and knowing how to invest during different market trends can help investors register profits despite underlying economic conditions.
Frequently Asked Questions
Is it better to buy bullish or bearish?
It is better to buy stocks and other securities during a bullish market backdrop.
Is a bullish market up or down?
A bull market is characterized by upswings.
How long will the bear market last?
The average U.S. bear market lasts 1.3 years.