Bear and Bull Markets Explained: What is a Bull Market and Are We In One Now?

Investing
hedge-funds-small-cap-stocks

by Susan Lyon

Two of the most commonly spouted terms in describing our financial markets are “bullish” and “bearish,” but unfortunately there is not a purely objective description of what these terms actually mean for investors and for the markets themselves.  Though highly subjective, they’re worth learning because they can guide you when thinking about market trends over time.

These terms aren’t particularly intuitive to you if you aren’t an animal lover, so many financial newbies become easily confused and mistakenly one term when they might actually mean the other.

 If you can only remember one fact about each animal, conjure up these images fast:

  • Bulls: bulls charge ahead and chase red flags
  • Bears: bears hibernate and prepare for a long winter

Here, we break down the most common characteristics of Bull and Bear markets so that the differences can be more easily understood.

What Is a Bull Market?

In its most basic sense, a bull market describes an upward trend among a specific market or group of securities that is rising in value or is expected to rise in value in the future.  References to bull markets are usually used when discussing stocks, but the term also applies to all other asset classes and categories (forex, commodities, bonds, etc.) as long as prices are seen gaining in value.  But what exactly causes these prices to rise?  And how can investors make forecasts that a Bull market is looming on the horizon?

Since basic laws of supply and demand govern markets, prices in financial markets will increase when supply of a stock (or other asset) decreases, or when demand for that same item increases.  Here are some telltale signs:

  • Bull markets are usually preceded by general optimism, upbeat expectations and investor confidence.
  • In the early stages, many of the market changes are psychological and may not or may not be accompanied by strong economic data or corporate earnings.

We can all think of examples of news stories where widespread optimism led to large run-ups in the price of a stock, for example, only to see actual earnings or company performance disappoint later.  While this is not always the case in a bull market, it should be remembered that a great deal of activity in the financial markets comes as a result of psychological expectations rather than a strong performance that can be proven by solid economic fundamentals.

Then What Is a Bear Market?

Conversely, a bear market shows a downward market trend over time.  In these cases, markets are seen to be “in hibernation” and the prices assets in these markets are either in decline or expected to be in decline in the future.  In bear markets, increasing fear/pessimism and decreasing investor confidence are the prevailing psychological determinants of these trends.

Perhaps the most famous historical bear market time period began after Black Friday in 1929, leading to the Great Depression when investor confidence stayed dramatically depressed for years to come.

A bear market rally – a short term market pricing increase within a longer term bear market, that can last just weeks rather than years – can take investors by surprise: watch out!

Are We In a Bull Market or a Bear Market Right Now?

When comparing bull and bear markets, it easiest to identify the overriding trend by simply looking at price activity itself.  If asset values are posting successive rallies over time – higher highs relative to values seen previously – investors would say a bull market is in place.  And vice versa.

Many argue that we’ve been in a ‘cautious’ bull market since March 2009.  But most analysts describe investors today as a combination of cautiously optimistic and highly doubtful, at best.  Though the S&P 500 rose to near its 5-year high after the BLS jobs report on October 5, it is now projected to slump with a weak earnings season on the horizon.  Some analysts say we are in the final days of a bull market, and others are even warning we won’t see another major bull market within many Americans’ lifetimes.  Because a bull or bear market is a longer-term classification, it is difficult to know in a given week or month where the economy stands; it is much easier to label a market in retrospect.

Other Expert Opinions: Are We In a Bull or Bear Market?

We turn to the experts to study the array of opinions around market confidence.  The issue is certainly not an objective one – they certainly don’t all agree and point out different short term and long term trends.

“In trend following, it cuts to the absolute bottom line indicator: price. If price moves up, there are more people buying. If it moves down, for whatever reason, there are more people selling.  Short term, we are at the bottom of the current trading range and should bounce up from here. Long term, we are still in an up trend and should continue for another 10-15% increase.  The fundamental argument is separate and full of opinions and conjecture, and, therefore, error prone.”

  • David A. Houle, CFA and co-founder and portfolio manager at Season Investments LLC, explains why bear and bull markets can be so subjective:

“This is somewhat of a subjective question, however a very important one that most investors don’t have a systematic way of answering. We have a proprietary quantitative model called MarketVANE that seeks to identify the “Seasons” and “Weather Patterns” in the market. The Season refers to the current valuation of the market relative to long-term norms. If the market looks unusually cheap then we would consider that a Summer season, whereas if it is unusually expensive we would consider that a Winter season. The Weather Patterns refer to the strength of the current trend as identified by moving averages, price channels, volatility and economic data (among other things).  I would define a bull market as a situation in which the market is cheaply or fairly valued with a strong upward trend intact, whereas a bear market is an environment of overvaluation with a downward trend intact. Sometimes this is well-defined and identifiable, and sometimes the evidence is mixed.”

“Stocks are in a bear market corrective process that has unfolded since the lows of 2009.  Of significant importance is the date 4/29/2011. On this date the NYSE Composite Index, the Mid-cap Index, the Value Line Index, the Russell 2000, the CRB Index, Silver, and Crude Oil all made highs.  The Dow Transportation Average made a high in July of 2011.  Meanwhile, the Dow and the S&P have slightly exceeded their 2011 highs.

This is a tremendously broad non-confirmation that is indicative of a topping process.  For market leaders like the Dow, S&P 500, and NASDAQ, we have also witnessed weakening volume as these markets have risen.  Additionally, there has been a great deal of mental relaxation of sorts with the VIX or volatility index being quite low.”

“The quick answer is we’re in a cyclical bull market inside a secular bear market: short term bull & long term bear.  There’s some great perspective on this from Ed Easterling at Crestmont Research. Ed’s work is based on the markets and their relationship to P/E ratios and their historical norms.”