Market trends are essentially indicators of a bear or bull market, and can be both a guiding or instigating tool for traders and investors to stake their moves in the financial markets.
A market trend is the observed inclination of financial markets to move in a specific direction over time.
We previously discussed the fundamentals of a bear market, and understand that a bearish market is when the market moves downwards 20% or more over a prolonged period of over two months. A bullish market is the last phase and the opposite of a bearish market. Let’s first recap the bearish phase:
Phase 1 – Characterized by high prices and high investor sentiment, investors begin to drop out of the markets and take in profits.
Phase 2 – Capitulation occurs, where stock prices start to fall sharply, with a decline in market activity and corporate profits. Economic indicators, which may have been optimistic once, also begin to fall below normal. Investors begin to panic at this stage, as their confidence in the market starts to fall.
Phase 3 – Speculators start to enter the market, thereby increasing some rates and trading volumes
Phase 4 – Stock prices continue to fall. However, this is also when investors begin to speculate and start entering the market again, leading to a bullish market.
Define Bull Market
A bull market happens when the conditions of a financial market demonstrate rising trends or expectations. It can be termed with anything financially tradable – Stocks, bonds, commodities and even cryptocurrencies like Bitcoin. Given the volatility of market movements in any economic context, a market can only be called “bullish” when the rising price trends continue for an extended period (up to months or years), just like how we define a bearish market.
Understanding the Bull
Bull markets are defined by investors’ optimism and confidence that market trends will go up, almost like prolonged speculation. The challenge is in the psychological effects in investors that will bring about a fear that the market will move downwards anytime, as it cannot be controlled, and people likely will follow the footsteps of another. As such, speculation plays a crucial role in the financial markets
A bull market happens when economy is strengthening with higher GDP, lowering rates of unemployment, growing corporate profits resulting in higher investors’ confidence. When investors are more confident, there will be a higher overall demand of stocks, thus prices will rise. Higher levels of IPO activity also occur in a bull market as companies get higher valuation for their equities.
Investing in Bull
Learning to leverage risks should be a given in any form of investment. Although, there are methods to invest in different market conditions, even in a bearish market.
Recap on Bear Strategies
Short-selling – Investors and traders can profit in a bearish market by selling borrowed shares and repurchasing them at lowered prices, otherwise known as short-selling. Short-selling is also a method used by traders or investors to hedge their funds, minimizing their portfolio risks.
Put Options – A type of derivative, Put Options is a contract that gives the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame
Fundamental and technical analyses are also used to predict market movements.
No matter the market condition, putting a long term focus in your investment is still key to wealth accumulation. Entering the financial markets when prices are low may be wise, but attempting to time the market could be a way to sabotage yourself.
A method to invest in a bull market is through dollar-cost averaging and buy-and-hold strategy.
Involves investing equal dollar amounts at set periods, allowing one’s portfolio to benefit from market declines. Dollar-cost averaging is a widely used method for building investment positions in the long-term.
A passive investment strategy where traders purchase an asset with the intention to hold, or HODL in cryptocurrency, it in the long term, no matter the market condition.
Bull vs Bear Markets
|Supply & Demand||Strong demand and weak supply for securities.||Demand lower than supply, resulting in a drop in share prices.|
|Investor Sentiments||Positive market sentiment as investors are more willing to enter the markets.||Negative market sentiment as investors begin to move their money out of equities and into fixed-income securities .|
|Economic Activity||Businesses profit as people are more willing to spend, driving economy activity and this results in a rise in stocks’ value.||Businesses are unable to bring in substantial profit due to low spending by consumers, resulting in a decrement in stocks’ value.|
|How to Invest||Buy stocks as prices begin to rise as early as possible, and sell at all time high. As losses are likely to be temporary, there’s capacity to invest in more equity that may reign high returns.||Engage in short-selling or put options strategies to leverage your risks as stocks’ value are likely to continue to fall in a bear market.|
While almost impossible to predict market conditions everytime, there are ways to monitor and learn the right strategies to invest or trade whether in a bullish or bearish market. It is also advisable to employ a variety of investment strategies and diversify your portfolio as risk management. For related articles, read DigiFinex Academy.