Bull and Bear Markets

Simply put, bull markets are movements in the stock market in which

prices are rising and the consensus is that prices will continue moving

upward. During this time, economic production is strong, jobs are plen-

tiful and inflation is low. Bear markets are the opposite – stock prices are

falling, and the view is that they will continue falling. The economy will

slow down, coupled with a rise in unemployment and inflation. In either

scenario, people invest as though the trend will continue. Investors who

think and act as though the market will continue to rise are bullish, while

those who think it will keep falling are bearish.

What causes bull and bear markets? They are partly a result of the

supply and demand for securities. Investor psychology, government in-

volvement in the economy and changes in economic activity also drive

the market up or down. These forces combine to make investors bid

higher or lower prices for stocks. To qualify as a bull or bear market, a

market must have been moving in its current direction (by about 20% of

its value) for a sustained period. Small, short-term movements lasting

days do not qualify; they may only indicate corrections or short-lived

movements. Bull and bear markets signify long movements of significant

proportion. The best-known bear market in the U.S. was, of course, the

Great Depression. The Dow Jones Industrial Average lost roughly 90

percent of its value during the first three years of this period.

Investors turn to theories and complex calculations to try to figure

out in advance when the market will scream upward or tumble down-

ward. In reality, however, no perfect indicator has been found. In their

attempts to predict the market, economists use technical analysis. Tech-

nical analysis is the use of market data to analyze individual stocks and

the market as a whole. It is based on the ideas that supply and demand

determine stock prices and that prices, in turn, also reflect the moods

of investors. One tool commonly used in technical analysis is the ad-

vance-decline line, which measures the difference between the number

of stocks advancing in price and the number declining in price. Each

day a net advance is determined by subtracting total declines from total

advances. This total, when taken over time, comprises the advance-de-

cline line, which analysts use to forecast market trends. Generally, the

A/D line moves up or down with the Dow. However, economists have

noted that when the line declines while the Dow is moving upward, it

indicates that the market is probably going to change direction and de-

cline as well.

A key to successful investing during a bull market is to take advantage

of the rising prices. For most, this means buying securities early, watch-

ing them rise in value and then selling them when they reach a high.

However, as simple as it sounds, this practice involves timing the market.

Since no one knows exactly when the market will begin its climb or reach

its peak, virtually no one can time the market perfectly. Investors often

attempt to buy securities as they demonstrate a strong and steady rise

and sell them as the market begins a strong move downward. Portfolios

with larger percentages of stocks can work well when the market is mov-

ing upward. Investors who believe in watching the market will buy and

sell accordingly to change their portfolios. Speculators and risk-takers

can fare relatively well in bull markets. They believe they can make prof-

its from rising prices, so they buy stocks, options, futures and currencies

they believe will gain value. Growth is what most bull investors seek.

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