Identifying bull and bear markets

If you are going to be trading in stocks, identifying the kind of market you are in is crucial. It is the primary way to learn about the status of a stock at the current moment. In case you are not aware, a bullish market is one where prices are rising, or may soon rise. Bearish markets are the opposite, where prices lower over time. You can use the knowledge for both of these to understand where you stand in the market with your trade. From this, you can evaluate what your plan of action should be.

Bull markets

So, what are the types of trends you would expect to see in a bull market?

First off, you should be looking at how traders behave in each market. In a bullish market, traders are positive and enthusiastic regarding the possible future of a stock. After all, they have all the reason to be if a stock is rising. They will likely invest more and more in a stock if the bullish market proves to be persistent. This could also be referred to as positive investor sentiment.

The overall economy also can tell you about the performance of a stock. If the economy surrounding a stock is doing well, it’s quite likely that the stock will as well. The economy also has an effect on employment figures. The lower unemployment is, the more likely that markets will be bullish. This is because people have more money to spend, giving businesses more of their liquidity. Additionally, more people are employed and can contribute to a company’s performance, raising their profits. This is more appropriate for the market in general, though.

There are also more specific indicators of a company’s performance to look at, more technical ones. The earnings a company reports are essential to know, and this information could come from a variety of different documents. Obviously, positive earnings are what you’d expect in a bullish market, preferably with rising earnings over time. You’d also expect stock valuations to be positive in a bull market. Another factor to look out for includes buyer confidence, which will drive the potential profits of a company.

Bear markets

As you can imagine bear markets tend to be the opposite of bull markets on all the points we just discussed.

Traders tend to be less positive in bear markets, uncertain if they should buy any more stock. This will usually follow continuing declining valuations. This is a negative investor sentiment.

A poorly-performing economy and high unemployment are also essential indicators. If, say, inflation is higher, the buying power of consumers is going to dissipate. Higher unemployment means less consumer spending and less productivity.

Stock evaluations will be lower, earnings will lower or be negative, and buyer confidence in a company remains low.

Dealing with bull and bear markets

In a bull market, your ultimate strategy should be to buy up as much as you can. However, this comes with a caveat. Make sure to remain diversified, but more importantly buy early. Identify if a market will soon become bullish and get there before anyone else does. You want to buy a stock when it is low in price, and sell when it is high or reaching its peak. In essence, you want to ride out the bull market from its start to the end. If you join too late, prices will be higher and you may find yourself near a peak, after which the prices will soon drop. In this way, you’d actually end up losing money.

Keep an eye all the other traders’ sentiments on a stock, as this is what will essentially drive price change.

A bearish market would mean a different approach. Defensive stocks or preferred stocks would ensure a steady stream of income for you. The dividends here tend to be steady, and do not closely follow market sentiment. Bonds are a great option in times of economic hardship. With economic distress, stock interest rates tend to rise to match inflation. Investing in these sorts of instruments means a greater possible future in the long run.

However, short selling is the most obvious way of making money in a bearish market. Short selling means betting against a stock’s performance. What you want to do is temporarily buy a stock and sell it, usually when market sentiment is more positive. Then, when prices are lower or are reaching a trough, you buy it again at a lower value. Of course, you would then want to eventually sell off the stock, whenever investor sentiment is higher again. The idea, again, is to beat everyone to the punch. Whatever your plan is, being ahead of everyone else is what is most crucial.

Conclusion

So there you have it. Bull markets tend to be positive energetic, and supported by a thriving economy. Bear markets, by contrast, are signs of negative prospects and a poorly-performing economy. However, you deal with either of these markets, be sure to remain ahead of the curve.