Anyone who has followed the markets has probably come across the expression of being bullish or bearish. But what does that mean? Is one better than the other and how do you determine the difference?
Bullish vs bearish viewpoints are dramatically different so make sure to read on to further understand these important concepts.
Bullish vs Bearish Explained
Being bullish means you are optimistic that prices will go higher from where they currently are while being bearish is the opposite; you think prices will trade lower from where they currently are.
Bullish traders will look to take long positions by either buying stocks, call options or any other financial instrument that will appreciate as prices go up.
Bearish traders are looking to take short positions where they will profit if the market or stock goes down from its current price.
Some traders are strictly bullish where they will only buy stocks that they think will go up. This tends to be the more popular approach to the markets as they tend to naturally go up over the long-term due to inflation and other macro-economic conditions.
However, being bearish can be just as profitable. Markets tend to steadily climb over a period of time while downturns in the market tend to be sharp and sudden allowing bearish traders to capitalize in a short period of time.
Being a Bull
Being bullish can range from long term views of overall market conditions as well as short term views where traders view a stock as bullish due to recent news specific to the company like earnings, new deals, etc.
If short-term traders are bullish, they believe that stock will go up in the coming minutes, days, or even weeks. This is based on analyzing intraday volume and price action or stock charts. In such instances, the bullish perspective has nothing to do with the underlying company.
If an investor perceives a stock is oversold, he or she may buy shares in the hopes of a quick reversal.
Other short term investors are bullish because they are hoping that some near-term event will occur favorably. For instance, a trader may purchase stock a day before the release of quarterly earnings anticipating that the company will supersede its expectations.
Bullish long-term trading
When investors are bullish for the long term, it implies that they have a favorable view of the company’s future. They believe that the stock is undervalued at the current share price.
This also applies to the overall market. If you’re bullish on the market you believe that economic conditions are favorable for an appreciate in prices.
Being a Bear
Traders bearish about an asset believe that its prices will fall. Investors with this belief may opt to act on it or not. If they choose to act, they may sell shares they currently possess, or they can sell a stock short. This means they borrow shares from their broker, sell them in the open market with the goal of buying them back for cheaper after prices fall.
A bearish market can become a self-fulfilling prophesy, in that a larger number of pessimistic investors may begin a down-trend by vigorously selling off the asset with expectations that prices will drop, but in effect cause the price drop themselves.
However, a reversal in this trend is experienced when speculators come in and purchase on the low, and prices gradually rise again as traders are hit back, resulting in a bullish market.
How to Trade Bullish and Bearish sentiment
The simplest way of connecting these terms to trading is:
- Investing in rising prices when traders are bullish about an asset or during bull markets.
- Investing in falling prices when traders are bearish about an asset or during bear markets.
Bull Market Explained
Generally, a bull market describes time-frames when prices increase. To be more precise, a bull market is a prolonged duration (months or years) where prices escalate.
The phrase is usually used in relation to the stock market; however, other classes of assets can also have bull markets, for instance, commodities, foreign currencies, and real estate.
Typically, the three major stock market indices go up at the same point in time. They include the NASDAQ, the S&P 500, and the Dow Jones Industrial Average.
- Bull markets commonly occur when the economy is strong or when it is spiraling.
- They tend to take place in proportion to sound gross domestic product (GDP) as well as a decline in unemployment and regularly correspond to an increase in corporate profits.
- The confidence of investors is likely to soar all through the period of a bull market.
- The overall market tone and stocks’ demand will be positive.
- A general rise in the quantity of IPO activity throughout bull markets can be witnessed.
Did you know? The S&P dropped in 2008 and bottomed in March 2009.
Tip: There is no particular and standard metric utilized to recognize a bull market. Nevertheless, the most conventional description of a bull market is a condition that involves a rise of 20% in stock prices, normally after a decline of 20% and prior to a second 20% drop.
Bear Market Explained
A period that is denoted with falling prices of stock depicts a bear market. Despite the fact that the financial inferences of bear markets can differ, by and large, bear markets are indicated by a 20% drop or more in stock prices over the duration of at least two months.
Typically, bear markets are linked with declines in the general market or index such as the S&P 500.
In terms of duration, bear markets can last for several weeks or multiple years.
During bear markets, the economy, more often than not, slows down, and the rates of unemployment rise as companies embark on letting go of their employees.
- Bear markets usually set out when investor confidence starts to diminish after a period of more propitious stock prices.
- The demand for securities is quite low as compared to supply; thus the prices of shares decrease.
- Investor sentiment and economic cycles play significant roles in the formation and drive of bear markets.
- Weak economies are associated with bear markets as a majority of businesses lack the capacity to document massive profits because customers are not spending almost enough.
- The prospective of losses is great since prices are constantly losing value without sight of the end.
Did you know? Analysts spend many hours attempting to mathematically establish what will trigger the next bear market, in addition to the extent it will last.
Tip: When trading activity intensifies, and investor confidence starts growing, a bear market can ultimately convert to a bull market.
Final thoughts – Bullish vs Bearish
Bullish vs Bearish are terms used to characterize trends in stock, commodity, and currency markets. The main difference between these two markets is whether confidence is low and prices are dropping or if they are high and prices are rising.
Acting on a bullish or bearish opinion should be guided by a well-defined and tested trading strategy.