Bull Markets, Explained
A bull market occurs when a broad market index rises at least 20% over two months or more. Bull markets signal higher levels of investor confidence and optimism about the future of the market. They are generally a sign of a strong, healthy economy.
The opposite scenario, in which stock prices fall by 20% over an extended period, is known as a bear market.
If you’re investing in the stock market, it’s important to know the nature of bull markets and their potential impact on your returns.
What Is a Bull Market?
When asset prices generally rise over time, the upward trend is known as a bull market. The traditional benchmark for identifying a bull market is an increase of 20% or more in a market index over a two-month period. For example, stock experts might look closely at the Dow Jones Industrial Average (DJIA) or the S&P 500 to determine whether a bull market exists.
Bull markets can imply that the economy is in good shape, with unemployment low and new jobs being created. Investors tend to view a bull market favorably because it suggests that stock prices may continue to rise over the long term. People who buy stocks early in a bull market may benefit later from the investments’ significant price appreciation.
Why Is It Called a Bull Market?
Although there’s no single explanation for how bull and bear markets got their names, people often suggest that the descriptive names are meant to reflect the nature of each animal.
Bulls, for instance, have a reputation for charging or attacking. In a bull market, eager investors may rush in to buy stocks in the hope of capitalizing on future price increases.
Bears, on the other hand, are often seen as being defensive animals that only attack when threatened. In a bear market, it’s common to see investors pull back out of caution and sell off stocks they own or avoid buying new ones. Those behaviors are often driven by fear and uncertainty about the market trending down.
Characteristics of a Bull Market
Identifying when a bull market begins or ends is sometimes challenging, given the nature of stock prices and how rapidly they can move up or down. Generally, there are three indicators that stock experts use to determine whether a bull market exists.
- Stock prices, or prices for a broad market index, have increased by 20% or more over a set period of time, typically two months or longer.
- Investor confidence is high and those buying into the market have an optimistic outlook toward the future.
- Overall economic conditions are largely positive, with low unemployment rates and, ideally, low inflation rates as well.
These three signs usually indicate that the market is on a sustained upswing. Other indications of a bull market can include strong earnings reports and marked increases in investors’ dividends.
What Causes a Bull Market?
Bull markets are usually driven by changing undercurrents in the economy. They tend to reflect the business cycle.
The business cycle experiences periods of expansion, followed by periods of contraction. Real gross domestic product is a commonly used metric for determining which of four phases the economy is in.
- Expansion. During the expansion period, the economy is growing and domestic production is up. There may be a bull market for stocks during this period.
- Peak. A peak occurs when the economy exhausts its ability to grow. At this stage, the bull market typically hits its highest levels before entering the next phase.
- Contraction. During the contraction period, the economy shrinks. Companies may cut back on spending or hiring to save money and stocks may enter bear market territory.
- Trough. The trough is the lowest point in the business cycle. It’s followed by the beginning of the next expansion phase, which can open the door to a new bull market.
The business cycle also influences when bear markets occur. In addition, there are times when a bull or bear market is triggered by something other than the business cycle. For example, in early 2020 there was a short-lived bear market caused by uncertainty over the emerging COVID-19 pandemic.
Example of a Bull Market
The bull market that began in 2009 following the shock of the financial crisis is the longest on record, lasting until the bear market that occurred in early 2020.
Several factors contributed to the sustained length of the bull market, including strategic moves to manage monetary policy on the part of the Federal Reserve, and tax breaks delivered by the 2017 Tax Cuts and Jobs Act.
Many stockholders benefited from steady dividend payouts, and the real estate market also delivered a strong performance during that time.
Bull Market vs Bear Market
Bull markets and bear markets are opposites in terms of how participants behave and what the outcomes can mean for investors. Bull markets typically involve upward movement of stock prices while bear markets indicate a downturn.
In a bull market, investors tend to take a positive view of the market. Bear markets, on the other hand, can trigger pessimism, fear, or other negative feelings among investors.
Bull markets are usually marked by thriving economies and high levels of corporate growth. Bear markets point toward a slowing economy and limited growth. In extreme cases, a bear market could suggest that a recession may be on the horizon (although a recession can offer certain opportunities as well).
Investing Tips During a Bull Market
Investing in a bull market isn’t one-size-fits-all, so your personal approach may be different from other investors’. There are, however, a few overall strategies that could help you to maximize gains while taking on a level of risk you’re comfortable with.
Keep Your Goals In Sight
It’s easy to be tempted to follow the crowd when investing in a bull market or a bear market, but it’s important to stay focused on your individual goals, especially if you’re a beginning investor. If you already have a financial plan in place, that plan can act as a guide for how to choose the right asset allocation during a bull market.
Diversify Your Portfolio
Diversification is an important tool for managing risk in a portfolio. When you’re diversified across different asset classes or industries, it helps to limit your exposure to certain kinds of investment risk. If one investment begins to decline in value, your other investments can help to bolster your portfolio.
A higher allocation to stocks may be optimal if stock prices are rising, but you may want to balance those out with less risky investments, like bonds.
If you’re investing in mutual funds or exchange-traded funds (ETFs), consider what assets each one holds to avoid becoming overweighted in one particular industry or sector.
Go Long in Your Positions
Going long simply means adopting a buy-and-hold approach when investing in a bull market. The end goal is to buy stocks at a low price, then sell them later for a higher price to maximize returns. The key is knowing how to identify the impending end of a bull market so that you can sell before prices drop.
The Takeaway
Bull markets, in which asset prices rise and investors feel optimistic, are a natural part of the market cycle. A bull market begins when a market index rises 20% or more over a two-month period, and it can last months or years. Generally, during a bull market, maintaining a diverse portfolio and a clear idea of your goals can help you manage your investments prudently.
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5 bullish indicators for a stock
When it comes to figuring out when to buy a stock, there are two main schools of thought: fundamental analysis and technical analysis.
Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits and the day-to-day details of a business’ operations.
Technical analysis involves only looking at charts. A stock chart is a visual representation of the price movement (also known as price action) of a particular security over time.
Using different mathematical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns.
Fundamentals need not be at odds with technical analysis. The most successful investors often use both methods.
Fundamental analysis works best for determining what stocks to buy, assuming an investor wants a stable, reliable stock to hold for the long term.
Technical analysis can help to identify when to buy a stock. Short-term traders sometimes use technical analysis in an attempt to profit from small price movements.
Below we will look at five common bullish indicators used in technical analysis and briefly discuss how they can be used to determine a reasonable time to buy a stock or ETF, the “entry point.”
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Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.
Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).
Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.).
Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.
All of these methods are broadly referred to as technical analysis — the process of using charts to try to predict which way a security will move next.
A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.
Here are five examples of bullish indicators and bullish patterns.
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The relative strength index (RSI) is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes.
The higher the RSI, the more likely the stock is overvalued. The lower the RSI, the more likely the stock is undervalued.
The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation. When it rises above a certain level, it can indicate — you guessed it — overvaluation.
RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.
An RSI of 50 is considered neutral, 30 and lower is considered undervalued (bullish), and 70 and above is considered overvalued (bearish).
The lower the RSI, the more of a bullish indicator it could be.
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The cup-and-handle pattern is among the most bullish patterns known to stock traders.
As the name implies, there are two main parts: a cup and a handle.
The cup is formed when a stock moves downward, then sideways and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).
The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:
- Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).
- The handle should form over a period of at least five days to several weeks.
- Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.
- Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.
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Moving averages are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.
A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information by themselves, sometimes, key averages interacting with one another can serve as major buy or sell signals.
The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.
This indicator is known as the “golden cross,” and it is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.
Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.
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Bollinger bands combine a simple moving average with an additional metric: a measure of price extending one standard deviation above or below the average.
When Bollinger bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.
While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.
For example, an investor might choose to look at Bollinger bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger bands were close together, that might give an investor further assurance that an upward move could be on the horizon.
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The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.
The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then, the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.
A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate.
When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.
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It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.
Another concern is time frame.
These indicators and patterns need to be looked at over a sufficient amount of time to prove effective — generally, the longer, the better. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.
Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge.
When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time.
This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.
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