Your money: Recognising and making the most of bull and bear market situations

Date : 20/06/2023
Read: 3 mins

Bull markets indicate rising stock prices and positive sentiment, while bear markets reflect falling prices and investor withdrawals. Analyse trends for investment opportunities.

Bear markets and bull markets are completely opposite market situations.
You can identify them by monitoring the stock price growth rate and the simple moving averages.
What you do when during these periods that define how much you earn from the stock market.

In the world of finance, bull and bear markets play a significant role in shaping investment strategies. It's crucial for investors to grasp the fundamental differences between these two market conditions.

This article provides valuable insights into identifying and understanding bull and bear markets.

Also Read: This is how you can conquer the stock market as the bull market king

Bull market vs bear market

A bull market is a market situation where investor sentiment is very positive and stock prices continue to rise. The thumb rule says that a bull market is in existence when the broad market indices increase by 20% or more in a consistent rise.

Bear markets are numerically opposite, i.e., broad market indices fall by 20% or more. This happens when investors withdraw money from the markets, resulting in too much stock supply and a resulting fall in their prices.

Also Read: 5 mistakes to avoid while investing in a bull market

Identifying bull and bear runs

During a bull run, you will notice that the market rises faster than the historical average. The opposite is true in the case of a bear market. The simple moving average is particularly helpful in this observation.

Simple moving averages (SMAs) are the average closing price level for a specific number of days. 50, 100 and 200-day SMAs are traditionally referred to for this purpose.

For instance, if the prices are above their 50-day SMA, 50-day SMA is higher than the 100-day SMA, and the 100-day SMA is higher than the 200-day SMA, it is a clear indication that a bull run has begun. The reverse situation would be an indication of a bear run.

Another indication is the highs and the lows. If the prices fall in between the rises, but the low is higher than the previous low, it is an indication that the bull run would continue. In a bear run, if there is a temporary rise but the rise is not higher than the previous highs, it means that the market has not yet recovered from a bear run.

The Takeaway

Once you are convinced that a bull run has started, you can buy during the initial stages and reverse your position when the rate of rise dwindles. Similarly, bear runs offer opportunities to accumulate good stocks at discount prices, which can be sold off once the market recovers.

Scenarios like rising commodity prices and inflation, unemployment and market volatility indicate the end of bull runs or the onset of bear runs. As an investor, it is always advisable to analyse the market properly and not be led by public sentiment alone.