Bullish vs bearish markets

What are bullish and bearish markets?

A bullish market refers to an environment where asset prices are rising, or are expected to rise, over a long period of time. It’s also referred to as a ‘bull market’ and it can last for months, or even years. Having a bullish outlook describes the confidence and optimism that traders and investors have in anticipation of long positions being profitable, owing to rising market prices.

A bearish market describes an occurrence where asset prices fall by 20% or more from recent highs. This decline usually spans across several months. Also referred to as a ‘bear market’, it reflects widespread pessimism among traders and investors, who might anticipate worsening market price performance. This could, in turn, lead to traders short-selling and investors selling off the relevant assets that they own, possibly driving prices down even further.

The terms 'bull market' and 'bear market' have been part of financial terminology since the early 1700s, originating from the London Stock Exchange (LSE). While some suggest the terms come from how these animals attack (bulls thrust upward, bears swipe down), others link them to historical bearskin trading. Merchants would sell skins before actually buying them from trappers, hoping prices would fall to increase their profit. Either way, these terms have become enduring metaphors for market direction.

How do bullish and bearish markets work?

In a bullish market, the demand for securities generally exceeds supply, causing prices to rise even more. This type of market condition often encourages trading and investing and it can lead to economic expansion.

Conversely, in a bearish market, the supply of securities generally exceeds the demand, resulting in prices dropping further. As mentioned, fears about economic downturns or disappointing earnings reports can prompt investors to sell assets that they own in the affected markets. In turn, a decrease in investment activity can be a precursor to a slowing economy.

It’s important for traders and investors to understand these market trends, as they can be useful in making informed choices about when to buy, hold or sell assets and which strategies to use.

What are the differences between bullish and bearish markets?

There are several differences between bullish markets and bearish markets – they include:

Key indicators of bullish and bearish trends

1. Market sentiment
   Market sentiment is a primary indicator of trend direction. Bullish trends are driven by investor confidence and positive news, which is influenced by economic conditions, political events and asset performance. Conversely, bearish trends stem from lack of confidence and negative economic indicators, often leading to widespread selling pressure.

2. Price movement
   Price movements often provide clear signals of market direction. Bullish trends show consistently rising prices, with assets typically trading above their long-term averages. During bearish conditions, prices decline steadily and tend to stay below these averages, once again signifying ongoing selling pressure.

3. Trading volume
   Trading volume plays a crucial role in confirming trends. Higher trading volumes during price increases typically validate a bullish trend's strength. In bearish markets, increased volume often indicates strong selling pressure. Importantly, volume spikes can signal either trend continuation or potential reversal, making it essential to analyse volume patterns alongside price movements.

4. Technical indicators
   Technical indicators, particularly moving averages, can help you identify and confirm trend direction. In bullish markets, prices consistently staying above long-term moving averages generally suggest trend strength. The opposite is true for bearish markets, where prices remaining below moving averages could confirm widespread negative sentiment.

5. Investor behaviour
   During bullish periods, strong buyer commitment emerges as investors anticipate further price rises. In bearish markets, increased selling pressure develops as investors expect lower prices, potentially accelerating the downward trend.

Bullish and bearish trends can have lasting market impact. Bullish conditions typically encourage increased investment and higher asset values, while bearish trends often lead to reduced investment and lower prices. Both types of trends can persist for extended periods, which could affect long-term market dynamics.

Trading strategies for bull and bear markets

In bull markets, where prices are rising or expected to rise, there are usually more traders taking long positions. Investors often adopt a 'buy and hold' strategy, acquiring stocks early in the trend to sell at a higher price later. This long-term strategy aims to capitalise on the market's overall upward trajectory, assuming continued growth over time.

Another common strategy in bull markets involves increased buying of index funds and equities, as these generally appreciate in value in such market conditions.

Learn more about bull market strategies

On the other hand, in bear markets – which are characterised by falling prices – an approach that benefits from a decline in the market is needed. Traders might engage in short-selling, where they sell borrowed assets, expecting to buy them back for less as prices drop.

During bear markets, defensive strategies are typically prevalent. Traders may increase their holdings in sectors less affected by economic downturns, such as utilities or consumer goods, which tend to perform relatively well even when other sectors struggle.

Learn more about bear market strategies

Psychological factors behind bullish and bearish sentiments

Bullish psychology is driven by drivers such as optimism and confidence; bearish psychology is underpinned by factors such as a pessimistic outlook on how the market will fare.

By backing your bullish or bearish sentiment with the necessary research and analysis as well as a well-thought-out trading plan, you increase your positions’ probability of success. However, it’s still not a guarantee of protection against possible losses, making it important to always manage your risk.

It’s important to understand that there are certain psychological factors that can influence your market sentiments, some that could even have detrimental effects. For you to mitigate this risk, you must be able to recognise your own psychological biases to figure out how you can regulate them.

Here are some of the common emotions and psychological biases that could influence your decision-making:

• Fear of missing out

• Selective attention to positive or negative news

• Overconfidence leading to excessive risk-taking

• Over-emphasis on successful trades

• Anxiety over missing opportunities

• Euphoria and fear that can lead to catastrophic thinking

• Sudden shift in sentiment during corrections

• Panic selling during downturns

• Group thinking in both directions

Historical examples of major bull and bear markets

The dotcom bubble: late 1990s bull market

The late 1990s' widespread growth of technology companies that's known as the dotcom bubble is an example of a major bull market. It was primarily fuelled by rapid advancements in internet-based companies. The S&P 500's value grew by over 300% from 1995 to 2000. Meanwhile, the value of the NASDAQ 100 shot up by over 1,000%.

The dotcom crash: 2000 to 2002 bear market

When the dotcom bubble burst, the NASDAQ fell 78% over 30 months after peaking on 10 March 2000. This drastic price drop occurred due to several reasons, including drying up of investment capital, large sell orders and panic selling.

The below chart of the NASDAQ 100 – called ‘US Tech 100’ on our platform – shows the index’s performance during the dotcom bubble and its subsequent crash.

The global financial crisis: 2007 to 2009 bear market

The collapse of Lehman Brothers triggered one of the most severe bear markets in history. The S&P 500 fell by about 50% in over 17 months as the housing market crashed and the banking crisis unfolded.

The below chart of the S&P 500 – called ‘US 500’ on our platform – shows the index’s performance during the 2007 - 2009 global financial crisis.

The Covid-19 crash: 2020's record-breaking bear market

The Covid-19 pandemic triggered the shortest bear market in history. The S&P 500 fell 34% in just 33 days in early 2020, but recovered quickly due to unprecedented government stimulus and monetary policy support.

Post-Covid bull market: 2020 to 2021

Following the brief Covid crash, markets experienced a remarkable bull run. The S&P 500 doubled from its March 2020 lows in just 354 trading days, the fastest bull-market-doubling since World War II.

The below chart of the US 500 shows the index’s performance during the Covid-19 crash and the subsequent bull market.

Bullish vs bearish markets summed up

• A bullish market refers to a condition where asset prices are rising or are expected to rise over a long period of time

• A bearish market describes an occurrence where asset prices fall by 20% or more from recent highs

• In bull markets, traders and investors aim to take advantage of momentum – buying rising stocks and selling them when they peak

• In bearish conditions, the focus generally shifts to capital preservation via more stable assets as well as reducing risk and avoiding losses

• There are psychological factors that can influence your market sentiments and decision-making – some could even have adverse effects on your trading outcome

• Managing your risk is always important, regardless of how the market is moving and whether it’s trending in a specific direction