What do bears and bulls have to do with the stock market?
These two animals are used to denote the manner of stock price fluctuations. While bears move slowly and put their paws down to attack, bulls rage and run with their horns up once seeing the red rag. Similar patterns may be tracked on the stock market. Stock prices go up and down. However, not every change is bullish or bearish. Moreover, not only stocks can behave like bears and bulls. The same words are used to describe investment strategies and market sentiments. Inexperienced investors may need some clarifications.
Bearish vs bullish trends
When we say the asset is “bearish”, it means the price is decreasing. Usually, the downward trend should be tracked over a prolonged period to be considered a bearish one. Short-time changes don’t typically qualify, since they may signal a quick panic reaction on some media news, rather than starting a new trend. In addition, not any price change is of particular interest to investors. A bear market is normally considered to exist when there has been a price decline of at least 20% from the peak price.
On the contrary, when the asset’s price rises 20% from the bottom indicator—it’s a clear sign of the “bullish” trend. During a bull run, the security may multiply its initial value, so investors flock in to gain some profits while the price is rising. Typically, bullish market trends increase consumer confidence and encourage people to join trading. Hence, upward trends are also sustained for quite a while, due to high speculative demand.
Nevertheless, intraday traders may take even the slightest price changes into consideration. In their lexicon, bearish and bullish denote short-lived ups-and-downs happening every daily trading period.
Bearish and bullish investors
“Bearish” investors have a feeling that some securities or markets will go down in the near future. Thus, they may be either inclined to sell assets they own before they decrease in value, or wait before buying new ones in anticipation of cheaper prices.
Another known trading strategy of a bearish investor is called short-selling. If you anticipate the stock price will go down you can sell shares at high prices and later buy the same amount back cheaper. If short-selling happens in large volumes, it becomes a manipulative instrument that forms new market trends itself.
“Bullish” investors, on the other hand, have optimistic expectations as for the market prices. They may hasten to buy an asset while it’s still affordable or hold on to the stocks they own believing they’ll make a better deal later.
Bearish and bullish beliefs may target a specific company, a broad range of assets, or the market in general.
How to detect bearish and bullish trends early
Market trends are usually cyclical. Thus, experts and seasoned professionals pay attention to special signs that forecast future changes.
A simple example of a bullish indicator is a large number of margin transactions, which means investors are buying a lot. Rising demand usually leads to a price increase. All-time highs, on the other hand, may mean the bullish rally is soon to end. They often (but not always) are followed by a bearish period, since the prices cannot rise ad infinitum.
There are also dozens of chart patterns that are attributed to either bullish or bearish trends. Dedicated technical analysis tools and related indexes also help to determine in which direction the market is heading.