Bull Market

A bull market occurs when many stock prices rise 20% from a recent low, with the price climb spanning for an extended period. In addition, it is accompanied by the expectations that prices will continue to go up. The bullish phase generally marks an increase in investors' confidence, increased corporate profits, reduced unemployment, and an improving GDP.

Key Takeaways                                                               

• A bull market is defined as a financial scenario whereby the prices of securities at large keep increasing and are presumed to continue rising for a while.
• Bull market trends also apply to various assets that can be traded, other than stocks, including commodities, bonds, currencies, crypto and real estate.
• It is a favorable stock market condition requiring at least 20% price hike in the broad market index.
• Investors can benefit from a booming market through long positions (buying and holding securities with hopes that the price will rise), long ETFs and call options.

Bull markets reflect a positive investor sentiment, and it is in contrast to the market pessimism of bear trends. A bull market is defined as a prolonged period of price rise in the stock market following lows such as a 20% decline from a previous peak. This can also occur in a market index, commodities, real estate, etc. Bullish trends can last from months to years, depending on the market sentiment.

Some growth spurt usually drives bullish markets. The 2020’s bull market is believed to result from a massive pandemic relief stimulus that boosted US investor sentiments with hopes of an upcoming economic recovery. Also, firms like Amazon, Netflix, Microsoft profited from the lockdowns. Resultantly, the S&P 500 index recovered in August 2020 at 3,394.99 after bottoming out in March due to the pandemic slowdowns. In addition, the NASDAQ Composite had shown recovery in June 2020.

Investments are high in a bullish market as participants engage in frenzied trading in hopes of further price rises. With increased investments and consumer demands in the well-performing sectors, the employment rises. Many long investors also trade heavily, further enhancing the stock prices.

As such, bullish markets often mark an increase in corporate profits, reduced unemployment, and an improving GDP. However, the trend ends someday when prices fall steadily, leading to a bearish market which is a pessimistic period of falling prices. This could arise from a state increased interest hike to curb hyperinflation or a fall in aggregate demands.

When market trends keep fluctuating, it becomes difficult for traders and investors to recognize the bullish trend. It doesn’t mean that prices won’t fall under a bullish market as corrections are common, but the overall trend should remain upward without hitting record lows.

Some broad indicators can help identify the onset of a bull market that brokers, investors, and market enthusiasts keep an eye on. They are listed below -

• One of the prime indicators is that the stock prices at large should climb up by at least 20% from a recent low. For example, in March, 2020, S&P 500 fell by over 30% from its record highs due to the pandemic. Over the course of following months, the index underwent a stunning recovery by rising over 70% from the March falls, plunging into a bullish trend.
• As such, studying the volatility index is quite essential. For example, if the stock market index such as the NASDAQ Composite or S&P 500 show a steady rise, it could be a sign market optimism.
• Suppose the economy has been experiencing expansionary demand policies such as falling tax rates, low-interest rates or increased government's expenditure. In that case, it is likely that a bull market will follow next as stocks recover before the economic recovery. Many experts say the US government's new expansionary fiscal policy to handle the Covid-19 slowdown has given way to a bullish trend.
• A simple way to identify bull market stocks is by observing the bond yields. If the interest rates on bonds or zero risk securities keep falling, the investors will incline towards the risk-avert stock market to earn fair returns. As a result, it will increase the demand and price for equity.
• Additionally, one can anticipate the fall of a bull market if the interest rates are increased, aggregate demands is falling, and there are crisis in the market.

The world encountered its longest bull market from March 2009 to March 2020, sustained for 11 years. It was the most impressive bullish move in the history that survived the European Sovereign debt crisis, civil wars in Iraq and Libya, the US-China trade war, and Brexit. However, the Coronavirus pandemic led to its downfall.

During this favorable market period, stocks like Dow Jones Industrial Average and S&P 500 performed stunningly. An important factor for its sustenance is believed to be the Fed funds target interest rate which was kept close to zero in the US.

Other historical examples include the housing bubble between October 2002 and October 2007 in the US that had induced 102% gains, post World War II gains, and dot-com bubble rallies.  

Investors can reap profits from a bullish market if they make sensible investment decisions based on market research and expectations.

1. One of the prominent tools for generating impressive returns from the rising market is through long positions. Investors buy securities at low prices and try to sell when the prices reach their peak, thus yielding high returns.
2. However, nobody can predict when the price fall is a correction or bearish trend. Additionally, waiting for the rally to reach its peak is risky as a peak can only be spotted in the hind sight. As such, investors are advised to refer to experts, read extensively, follow market indicators and take rational decisions.
3. Option investors can also benefit in this scenario from the call options. Option buyers purchase securities at a lower strike price and make a profit if the stock price surpasses the option's strike price.
4. Investing in mutual funds, ETFs, bonds, well-reputed brands with stable earnings, etc. i.e. diversifying your assets can help cushion against sudden changes in the market.