What are Considered Bull Markets and Bear Markets?
The markets are governed by two overarching macrotrends: bull markets and bear markets.
Most markets—as with the broader economy—rise in a jagged pattern for extended periods of time that can last years (major uptrend), then fall irregularly for another extended period of time (major downtrend).
Definition of Bull Markets and Bear Markets
A major uptrend can last from several weeks to several months and is otherwise known as a bull market. The converse is true for a major downward, or bear market. These movements are distinct from daily movements and other short-term price fluctuations.
A bull market is defined as continuing as long as each successive advance of the primary trend peaks higher than the one preceding it. A bear market is defined as one in which each successive decline carries the market to new lows.
A bull market is characterized by rising prices and growing optimism. Likewise, falling prices and growing pessimism characterize a bear market.
Within a major uptrend or downtrend, several secondary reactions occur against the trend, lasting for a few days, weeks or even months, but they don’t necessarily change the definition of the overall trend.
In the stock market, for example, prices may drop precipitously, even during a powerful bull market, for several weeks at a time. This is known as a “correction.” If the uptrend is still in place, a rally will then ensure.
If a rally movement doesn’t succeed in breaking through the previous high and the market subsequently declines to fall below a previous low, the movement has switched from a bull market to a bear market.
How to Invest in Bull Markets and Bear Markets
It is difficult (some would argue impossible) for investors to precisely time bull markets and bear markets. That’s because markets often rise higher than most investors and analysts anticipate—and sometimes fall lower than they could possibly fathom.
That’s why investors are counseled to never bet against a bull market or bear market. These respective trends can last for long periods of time. As a rule, investors should not stubbornly buck the trend, which is akin to swimming against the tide.
The key for investors is to either step to the sidelines, or pinpoint stocks that perform well in a major uptrend or downtrend when one is occurring.