LeoGlossary: Bull Market
A way to describe a market that is moving up in price due to the underlying macroeconomic conditions or improving internal conditions if applying to a business.
This usually is applied to stocks but can incorporate any asset class.
People often discuss bull markets with:
FOREX is the pairing of currencies so one will be in a bull against other ones. The other side of the pair will be in a bear market.
In equities, a bull market is noted as a 20% increase after two 20% declines.
Business Cycle
Markets often follow the business cycle. This is highly applicable to stocks.
When the cycle is on the upside, moving away from the trough, the market is going in the same direction. Historically, the market tends to bottom out about 6 months before the economy.
The same is true on the other side. Once the peak is reached, the downhill slide causing the drop in prices. This all follows the psychology of humans which the business cycle follows.
Markets have the advantage of being able to move faster than economies.
Sentiment
Bull markets are accompanied by a feeling of optimism. Investor confidence improves and there is are expectations of performance.
Early stages of the bull market tend to see sentiment shift ahead of fundamentals. Corporate earnings, as an example, can lag as the economy is still a bit sluggish. Lagging data such as unemployment is still garnering the headlines, causing things to move slowly.
As conditions improve, the sentiment starts to move forward at an accelerating pace. Signs of economic improvement
This moves into a risk-on environment. Investors become willing to take on more risk, moving out of safer fixed income instruments to riskier assets.
When the sentiment gets out of control, we can often see a bubble form. This moves into the stage of FOMO (Fear of Missing Out). Greed starts to take over where people buy at elevated prices believing the bull will continue.
Liquidity
Bull markets see an increase in volume as it progresses off the bottom.
This is marked by more liquidity coming into the market. With prices moving up, people are not selling. This causes more liquidity in the market as buyers are brought in and sellers diminish. It allows people to buy and sell at reasonable prices.
Bear Market
Bull markets are guaranteed to end and replace with a bear market. While the length of the bull markets can vary, they do end.
Most experienced investors are aware of this. As the bull advances, profits are taken by selling off some assets. These are the people selling to those infected with FOMO.
Once the peak is reached, the market reverses. This starts the trend towards the bear market.
Bear markets tend to end with a bottoming formation. The slide ends yet the reversal is not immediate. With bull markets, the reversal can often be quick and powerful.
This more liquid a market, the more applicable this is. Real estate, as an example, tends to have a topping pattern when the bull markets end.
