What is a bull market? Definition, trading and investment strategies
Did you know that at the beginning of 2021, the longest bull cycle in the market in history ended?
From the onset of the financial crisis in 2008 to the post-pandemic period in 2020, the Nasdaq 100 has risen over 800%, with some stocks like Amazon up over 5,000%!
Of course, not all markets have been as rosy, which highlights the importance of understanding when you are in a bull market and what strategies to use to capitalize on it. Read on to find out more!
What does bull market mean?
In simple terms, a bull market is a period when the market experiences an increase in prices. So what does a bull market mean? In essence, this means that buyers control the market and are the dominant players while the number of sellers is very small.
- The US Securities and Exchange Commission defines a bull market as “a time when stock prices are rising and market sentiment is bullish. Typically, a bull market occurs when the broad market stock index rises 20% or more for at least two months.
Most investors prefer bull markets because most fund and pension portfolio managers only trade long positions. This means that they are limited to buying assets that will rise in value, and this is just one of the reasons why periods of bullishness in the market are really long.
In fact, a bull market can form on any type of financial market instrument: stocks, indices, commodities, currencies, bonds, and so on. Having access to a range of tools can be helpful for risk diversification in bull markets.
Bull market and bear market - what is the difference between them?
Bull markets are periods of time when the value and price of a financial asset rises. Bear markets are periods of time when the price of a financial asset falls and it depreciates. The US Securities and Exchange Commission defines a bear market as a decline "by 20% or more for at least two months." Basically, a bear market is the opposite of a bull market.
Rising prices in a bull market inevitably leads to the fact that more investors come into the market who also want to capitalize on higher prices. This in turn improves market sentiment, thus attracting even more people and pushing prices up even more.
In a bear market, the opposite is true. Falling prices cause pessimism in the market, which leads to a sharp and sustained decline in asset values. When prices fall, people tend to panic and make irrational decisions. This is the reason for the emergence of short-term positive sentiment in bear markets. The most famous bear markets were the 2000 dot-com bubble, the 2008 global financial crisis, and the 2020 coronavirus pandemic.
History of the bull market
Throughout history, we have seen many periods of bull markets, each of which lasted a different amount of time. Some bull markets are secular, meaning they can last anywhere from five to 25 years. The housing boom from 2002 to 2007, also known as the housing bubble, was a bull market. It arose after the US Federal Reserve lowered interest rates to stimulate investment. In 2007, the stock market peaked, which marked the beginning of a recession and a bear market period.
However, the longest bull market cycle in history lasted from 2009 to March 2020, as shown in the chart below. The record bull run lasted almost 11 years, with the S&P 500 stock market index rising over 400% during that period, and the rise in individual stocks was even more impressive. What's more, many analysts call it the biggest wealth-creating factor of our time, with nearly $20 trillion in returns in the stock market.
The bull market ended in March 2020 during the coronavirus pandemic when the S&P 500 fell 33.9% between February 19, 2020 and March 23, 2020. After that, we saw a short period of bear market which actually marked the start of the bull market from the March 2020 price lows. The index's all-time high on August 18, 2020 confirmed the start of a bull market cycle.
It also means that bullish sentiment has dominated the stock market since the end of 2020. Thus, learning how to identify the key characteristics of bull markets is one of the first steps in taking advantage of it. Before we break down the investment and trading strategies that are appropriate for this, let's look at how we can determine that we are in a bull market, as well as its key characteristics.
How to understand that we are in a bull market?
A bull market is similar to the boom phase of a business cycle. This is the most desirable time for investors as companies and businesses tend to make steady profits and the unemployment rate remains low. Since this situation allows consumers to spend and invest more funds, usually the stock market returns during this period.
Let's look at the key characteristics of a bull market:
- The growth of the stock market is at least 20% in two or more months. As prices rise, investors' desire to keep buying only gets stronger, which only fuels the bull market.
- Drop in the unemployment rate. As positive market sentiment grows, companies begin to receive more funds from shareholders and usually expand their operations by hiring more people, which in turn reduces unemployment.
- Globally supported rally. Usually bull markets develop in conditions of loose monetary policy of central banks. For example, the longest bull market in history, from 2009 to March 2020, was fueled by record low interest rates.
Traders and investors also commonly use technical analysis to identify bull market opportunities. For example, moving average technical indicators, which are widely used by traders and investors, help to find the long-term average of the price, as well as determine long-term trends.
Although the longest bull market in history began in 2009, it wasn't until around 2012 that the 50-day, 100-day, and 200-day exponential moving averages began to move up and separate from each other.
This was the start of a long-term uptrend, but they still maintain the same order today. This is why moving averages are widely used by investors. With the help of them, you can not only determine the price levels for entering the market - as can be seen from the numerous bounces of the price up when reaching the moving average levels - but also follow the trend.
Trading and investing strategies in a bull market
There are many trading and investment strategies that traders should look out for in a bull market. Let's take a look at a few different styles.
Buy and Hold Investing Strategy in a Bull Market
The most common style of investing in a bull cycle is the "buy and hold" strategy: investors buy an asset and hold it for as long as possible. Investors following this strategy typically hold positions for at least a few months, but most often for several years. This is because a bull market usually coincides with the up phase of the business cycle.
Investors, however, can make more precise investment choices. Given the rotation of sectors during the economic cycle, investors can benefit from the growth of the broader stock market, as well as from any other sectors in demand. For example, during the recovery phase, the consumer, technology, and real estate sectors tend to perform well.
The iShares US Real Estate ETF aims to provide investors with access to US real estate companies and REITs (Real Estate Investment Trusts) that allow direct investment in real estate.
During the longest bull market from 2009 to 2020, this ETF also maintained a solid uptrend with the 50-day, 100-day, and 200-day exponential moving averages moving in the same manner.
The Technology Select Sector SPDR Fund, which aims to provide investors with access to companies that are part of the S&P 500 Index. These companies work with technological equipment, data storage, software, semiconductors, provide IT services and more. In this case, the trend was smoother during the bull market from 2009 to 2020. By analyzing the sector in this way, investors can determine which companies are most likely to perform best during a bull market.
Swing trading in bull markets
Swing trading is a trading method in which a trader buys or sells trading instruments by holding trades open for several days, and in some cases several weeks. This style involves trading with the trend and can be useful when the market is clearly in a bullish trend.
Typically, swing traders use a combination of technical and fundamental analysis to make trading decisions: The most popular indicators are the Stochastic Oscillator and the Relative Strength Index (RSI).
For example, the Technology Select Sector SPDR fund at the very beginning of the bull market in 2009, all three moving averages crossed and continued to move up, thus confirming the established bull trend at the end of 2010.
After that, swing traders would typically use indicators such as the stochastic oscillator to spot signs of an oversold market. Such signs are usually considered situations when the stochastic lines are either below level 20 or the lower horizontal line in the indicator window.
Since swing traders tend to hold open positions for several days or weeks, they may well consider trading Contracts for Differences (CFDs), as CFDs allow traders to speculate on higher and lower prices using leverage. This means that you can trade a larger position using a smaller deposit.