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Bulls vs. Bears. It’s a generational rivalry, both in the markets and amongst sports fans. But if  you’re reading this article, you probably want to hear more about the market terminology and less about Chicago sports talk radio. Bullish vs. bearish refers to an overall market sentiment. Bulls believe (or want to believe) that a particular market, index or security will go up in the future, while bears take the opposite side and predict decline.

You don’t need to necessarily take a side in every battle, but you do need to understand the differences in bull and bear markets to have long-term investing success. Everyone looks like a genius when bull markets are raging, but successfully navigating bear markets is how great investors separate themselves from the rest.

What is a Bull Market?

Investors love a bull market because everyone looks smart during them. A bull market can be defined as a market where securities have jumped 20% from the previous lows. Bull markets usually underpin good economic data like low unemployment and high GDP growth. They also tend to be longer lived than bear markets.

In bull markets, stocks see far more buyers than sellers and share prices are pushed increasingly higher. Bull markets can be supercharged by government policy as well. Falling interest rates have been a boon to the stock market for decades now and easy fiscal policy in 2020 resulted in many Americans putting record amounts of capital into stocks.

Advantages of a Bull Market

Pros and cons on bull markets might seem redundant, but it’s important to keep your wits even when everything you buy is going up. Knowing your own limitations as an investor is crucial to have success in both bull and bear markets.

  • Stock Prices Increase — Not exactly groundbreaking info here, but bull markets can make investors lots of money by simply buying and holding. No complex investing strategy is necessary.
  • Reflects Good Economic Projections — Nothing sends a stock price higher like a significant earnings beat. When stock prices are rising, it usually reflects the underlying rise in corporate profits. 

Disadvantages of a Bull Market

  • Incentivizes Risky Behavior — Bull markets tend to make everyone look like a genius. And when investors think they’ve got it figured out, they tend to use more leverage. One of the reasons bull markets end is because investors become overleveraged and cannot withstand even minor price declines.
  • Propagates Con Artists — Whether it’s Nikola’s (NASDAQ: NKLA) fake electric truck or worthless non-fungible tokens (NFTs), bull markets make even the sharpest investors greedy, wide-eyed and susceptible to investment scams. 

What is a Bear Market?

How bulls and bears came to represent different traders in the market is up for debate. The fighting patterns of the animals are a common explanation (bulls fight with horns up, bears fight with claws down). Besides, a bear would beat a bull in a real fight, and that’s not what market participants want to see.

According to Merriam-Webster’s, the origin actually came from bearskin traders who would take payment for skins and provide the merchandise at a later date. From this transaction came a popular saying: it’s not smart to sell a bearskin before catching the bear. Since a trader accepting payment up front would benefit from a future decline in the price of the goods they sold, those who profited off price declines became known as bears.

In market terms, a bear market is when stock prices decline at least 20% from their previous highs. Bear markets can occur in individual securities, ETFs, sectors or in the broader market as a whole. The last time U.S. stocks entered a bear market was March of 2020, when COVID-related shocks sent major indices down as much as 30%.

Advantages of a Bear Market

Bear markets aren’t necessarily bad. If stocks went up forever, returns would be narrowed and edged away as risk dissipates. Risk-free assets would struggle to outpace inflation, so corrections and bear markets are necessary for securities markets to function properly. No risk, no reward, right? Here are a few advantages of bear markets:

  • Fraud Detection — When bull markets are raging and money is flying into stocks, it’s easy for scammers to lure in unsuspecting victims. FOMO is a powerful force (just check out the NFT markets right now) and many otherwise smart investors lose money in bull markets attempting to keep up with the Joneses. A bear market reveals who has legit business interests and who’s just trying to make a quick (and often unearned) buck.
  • Removal of Over-leveraged Investors — Warren Buffett is often attributed as the person who said “when the tide goes out, you find out who’s been swimming naked.” In bull markets, investors might take on too much risk in the form of leverage or borrowed money. Bear markets quickly send over-leveraged investors to the exits as margin calls are issued and positions liquidated.
  • Stocks on Sale — Bear markets tend to be short-lived, lasting anywhere from a few weeks to a year or 2. Long bear markets can be brutal, but most tend to clear up in less than a year, which means opportunities to purchase quality stocks at a discount. Companies like Amazon (NYSE: AMZN) and Alphabet (NYSE: GOOG) took big hits during the March 2020 bear market, but forward-thinking investors purchased these shares and saw huge returns almost immediately. 

Disadvantages of a Bear Market

  • Recession or Depression — Bear markets don’t always represent a downshift in the larger economy, but they could be a barometer of future economic headwinds. Recessions are harmful to everyone, especially those who don’t have capital parked in the financial markets. Losing 20% on your investments is tough, but losing your paycheck in a recession is tougher.
  • Corrupted Mindsets — When you make tons of money off a bearish event, it’s difficult to break away from that mentality. Michael Burry made a fortune off the housing crash but has a poor track record of bearish bets since. Jim Paulsen made the single greatest trade in history during the housing collapse, but his penchant for pessimism led him to poor performing assets like gold in the following years. Predicting the downfall of the American economy might earn you Twitter followers or newsletter subscriptions, but it probably won’t get you rich unless you’re in the right place at the right time. 

Are We in a Bull or Bear Market?

As of this writing, all major U.S. indices are trading near their all-time highs and have more than doubled off the lows from March 2020. Many investors have claimed that the 2009 to 2020 run was the longest bull market in history, and the performance of the stock market in that time makes it difficult to argue.

Today, the bull market is once again roaring as stocks seemingly make new highs on a weekly basis. If investing at all-time highs makes you nervous, a system of dollar-cost averaging could limit your downside risk. Put the same amount into the market each week or month, set a specific allocation for stocks and rebalance your portfolio when your stock portion exceeds your allocation target. This process allows you to take profits when bull markets are ripping and rebalance stocks when bear markets appear.

What Are Market Indicators?

Determining whether the current market is a bear or bull is the easy part. But predicting the market’s next move? That’s the million dollar question. Investors used many different tools in an attempt to predict the direction of stocks, including market indicators used in technical analysis.

Market indicators can be used in conjunction with fundamental data in order to form a more coherent picture of market trends. Some indicators are easy to use, others require a bit of experience and research. But no single indicator is a golden goose — you’ll need more than 1 data point to make an educated guess on the market’s next move.

  • Moving Averages — One of the most popular indicators, moving averages, take random price data over a period of time and create a smoother trend line that traders can more easily find entry and exit points on.
  • Support/Resistance — These indicators work hand-in-hand. Support levels are price points where the stock tends to find buyers. Resistance is the opposite — a price point where sellers come out en masse and push the share price down.
  • MACD — The Moving Average Convergence Divergence indicator is a technical tool that uses the 26-day moving average and 12-day moving average to form a support line that creates buy and sell signals.
  • RSI — The Relative Strength Index, an indicator that shows stock price momentum, can help predict when a particular security is overbought or oversold. Over 70 on this indicator shows an overbought stock; under 30 shows an oversold one.

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Learning to Trade in Both Bear and Bull Markets 

Bull markets don’t last forever. Every investor will encounter a brutal bear market at some point in their career, and that’s when real decisions must be made. It’s easy to invest in bull markets, but bear markets can be confusing and irritating to unprepared investors.

Will you lose money in bear markets? Yes, you will. But how much you lose depends on your trading plan, risk tolerance and personal experiences. If you can keep your head during the worst of a bear market, you’ll have a significant advantage over 90% of the investing world.

Frequently Asked Questions

Is a bear market good or bad?

Bear markets are bad for investors in the short term but in the long term could provide opportunities to purchase stocks below their true value. Without bear markets, risk would be non-existent and stocks would fail to produce returns above riskless assets like Treasuries or CDs.

What defines a bear market?

A bear market is defined as a 20% drop in prices from a previous high. A drop between 10% and 20% is known as a correction. On average, bear markets tend to last a few months and the average drawdown during a bear market is around 30%.

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