Bull Market Definition
A bull market occurs when many stock prices rise 20% from a recent low, with the price climb spanning for an extended period. In addition, it is accompanied by the expectations that prices will continue to go up. The bullish phase generally marks an increase in investors’ confidence, increased corporate profits, reduced unemployment, and an improving GDP.
- A bull market is defined as a financial scenario whereby the prices of securities at large keep increasing and are presumed to continue rising for a while.
- Bull market trends also apply to various assets that can be traded, other than stocks, including commodities, bonds, currencies, crypto and real estate.
- It is a favorable stock market condition requiring at least 20% price hike in the broad market index.
- Investors can benefit from a booming market through long positions (buying and holding securities with hopes that the price will rise), long ETFs and call options.
Understanding Bull Markets
Bull markets reflect a positive investor sentiment, and it is in contrast to the market pessimism of bear trends. A bull market is defined as a prolonged period of price rise in the stock market following lows such as a 20% decline from a previous peak. This can also occur in a market indexMarket IndexA market index tracks the performance of a diverse selection of securities that make up a significant part of the financial market. It serves as an indicator of the overall financial market condition by listing the historical and real-time trends in different market segments. , commodities, real estate, etc. Bullish trends can last from months to years, depending on the market sentiment.
Some growth spurt usually drives bullish markets. The 2020’s bull market is believed to result from a massive pandemic relief stimulus that boosted US investor sentiments with hopes of an upcoming economic recovery. Also, firms like Amazon, Netflix, Microsoft profited from the lockdowns. Resultantly, the S&P 500 index recovered in August 2020 at 3,394.99 after bottoming out in March due to the pandemic slowdowns. In addition, the NASDAQ Composite had shown recovery in June 2020.
Investments are high in a bullish market as participants engage in frenzied trading in hopes of further price rises. With increased investments and consumer demands in the well-performing sectors, the employment rises. Many long investors also trade heavily, further enhancing the stock prices.
As such, bullish markets often mark an increase in corporate profitsCorporate ProfitsCorporate profit, or ‘profit after tax, is the net income received from the business after deducting direct expenses, indirect expenses and all the applicable taxes from the total revenue generated by the company during the year., reduced unemployment, and an improving GDP. However, the trend ends someday when prices fall steadily, leading to a bearish marketBearish MarketBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market. which is a pessimistic period of falling prices. This could arise from a state increased interest hike to curb hyperinflationHyperinflationHyperinflation is an accelerated level of inflation that tends to quickly destroy the actual value of the local currency since there is a rise in the cost of all products and services. It forces people to lower their holdings in that particular currency to participate in stable foreign currencies. or a fall in aggregate demands.
Bull Market Indicator
When market trends keep fluctuating, it becomes difficult for traders and investors to recognize the bullish trend. It doesn’t mean that prices won’t fall under a bullish market as corrections are common, but the overall trend should remain upward without hitting record lows.
Some broad indicators can help identify the onset of a bull market that brokers, investors, and market enthusiasts keep an eye on. They are listed below –
- One of the prime indicators is that the stock prices at large should climb up by at least 20% from a recent low. For example, in March, 2020, S&P 500 fell by over 30% from its record highs due to the pandemic. Over the course of following months, the index underwent a stunning recovery by rising over 70% from the March falls, plunging into a bullish trend.
- As such, studying the volatility indexVolatility IndexVolatility Index, abbreviated as VIX, gives an indication of the expected volatility in the stock market and is based on S&P 500 index options based on 30 days forward period. is quite essential. For example, if the stock market index such as the NASDAQ Composite or S&P 500 show a steady rise, it could be a sign market optimism.
- Suppose the economy has been experiencing expansionary demand policies such as falling tax rates, low-interest rates or increased government’s expenditure. In that case, it is likely that a bull market will follow next as stocks recover before the economic recovery. Many experts say the US government’s new expansionary fiscal policyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. to handle the Covid-19 slowdown has given way to a bullish trend.
- A simple way to identify bull market stocks is by observing the bond yields. If the interest rates on bonds or zero risk securities keep falling, the investors will incline towards the risk-avert stock market to earn fair returns. As a result, it will increase the demand and price for equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet..
- Additionally, one can anticipate the fall of a bull market if the interest rates are increased, aggregate demandsAggregate DemandsAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices. is falling, and there are crisis in the market.
The world encountered its longest bull market from March 2009 to March 2020, sustained for 11 years. It was the most impressive bullish move in the history that survived the European Sovereign debt crisis, civil wars in Iraq and Libya, the US-China trade war, and BrexitBrexitBrexit refers to the combination of Britain and Exit, which signifies the withdrawal or exit of Britain from the E.U. or European Union. The residents of Britain actually voted for the exit of Britain from the E.U. and these votes were split amongst the constituent nations of the UK, for asking the stay of Wales and England and exit of Northern Ireland and Scotland.. However, the Coronavirus pandemic led to its downfall.
During this favorable market period, stocks like Dow Jones Industrial Average and S&P 500 performed stunningly. An important factor for its sustenance is believed to be the Fed funds target interest rate which was kept close to zero in the US.
Other historical examples include the housing bubble between October 2002 and October 2007 in the US that had induced 102% gains, post World War II gains, and dot-com bubble rallies.
How to Profit from the Bull Market?
Investors can reap profits from a bullish market if they make sensible investment decisions based on market research and expectations.
- One of the prominent tools for generating impressive returns from the rising market is through long positionsLong PositionsLong position denotes buying of a stock, currency or commodity in the hope that the future price will get higher from the present price. The security can be bought in the cash market or in the derivative market. The course of action suggests that the investor or the trader is expecting an upward movement of the stock from is prevailing levels.. Investors buy securities at low prices and try to sell when the prices reach their peak, thus yielding high returns.
- However, nobody can predict when the price fall is a correction or bearish trend. Additionally, waiting for the rally to reach its peak is risky as a peak can only be spotted in the hind sight. As such, investors are advised to refer to experts, read extensively, follow market indicatorsMarket IndicatorsMarket indicators serve as quantitative measures to the traders for predicting the stock market trends and fluctuations with the help of financial ratios and other relevant data so acquired. and take rational decisions.
- Option investors can also benefit in this scenario from the call options. Option buyers purchase securities at a lower strike price and make a profit if the stock price surpasses the option’s strike priceStrike PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market..
- Investing in mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etc, ETFsETFsAn exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange., bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period., well-reputed brands with stable earnings, etc. i.e. diversifying your assets can help cushion against sudden changes in the market.
A bull market marks a constant rise in the financial market, such as a stock market with the prices of the assets increasing by at least 20% in few months from their recent lows. Conversely, a bear market signifies a downfall in the prices by almost 20% or even more in an extended period. Investors often compare the pros and cons of a bear vs bull market to judge their profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance..
The bull market is called so because such a market shows an upward price move, just like a bull that lifts its horns upward while attacking its opponent.
A bullish market trend usually results in more employment opportunities, rising GDP, higher corporate profitability and accelerating investment which are all positive signs.
Following the Coronavirus relief stimulus by the US government, the success of Amazon, Netflix, Microsoft, etc. during lockdowns, lower interest rates, and positive sentiments amongst many investors, major US market index recovered in 2020 post the pandemic woes. However, there are mixed views as to how long will it last.
This article has been a guide to What is Bull Market and its definition. Here we discuss the examples of the bull market in detail along with its advantages and disadvantages. You can learn more about financing from the following articles –