Bull and bear markets are two very different animals - in more than one way. The ability to discern whether you are in a Bull market (going up) or a Bear market (going down) is fundamental for traders and investors alike. And if you can identify when the market is changing from one bias to the other, then you can put yourself in a position to benefit from a market that is moving either up and down.
We will look at how fundamental and technical analysis can help you identify when the market is ‘nearing a turn’ and how you should look to position yourself to take advantage of this move.
DIFFERENCES BETWEEN A BULL AND BEAR MARKET - TALKING POINTS
- Traders should know how to confidently approach, enter and exit both Bull or Bear markets.
- Macro-fundamental shifts normally signal market shifts.
- Positive sentiment helps fuel a Bull market and negative sentiment a Bear market.
- Bear market moves tend to be more volatile.
- Technical analysis can help pinpoint market entry and exit points.
WHAT IS A BULL MARKET?
Bull markets are characterized by rising prices, ongoing positive sentiment and a positive economic backdrop. A common metric used to define a Bull market is when the price of an asset has moved 20% higher from its recent, significant low. Bull markets can last for months or even years.
WHAT IS A BEAR MARKET?
FUNDAMENTALS ARE SIGNPOSTS TO A BULL OR BEAR MARKET
Fundamental analysis helps traders paint a contemporary landscape of a financial market, allowing them to then ‘dig down’ using other analytical tools and techniques. The role of a central bank is crucial in modern financial markets and they should be followed closely to determine the current state of the economy and the future path of interest rates.
Interest Rates and the Foreign Exchange Market.
If a central bank announces that it is changing its monetary policy stance or that the economy is now expanding/contracting, then foreign exchange and fixed income markets will also change their price/value to reflect this. In addition, the political landscape needs to factored in, along with any trade disruptions or disputes both internally and with external partners.
Stock and share fundamentals are slightly different as they tend to be more company-focused, looking at metrics including: cash flow, dividends, earnings, return on investment and management history and competence among other considerations.
SENTIMENT AN IMPORTANT DRIVER
Market sentiment has a very important role to play when deciding if an asset class is on the cusp of a turn or not. Sentiment is seen as the overall market tone with an optimistic, positive sentiment a driver of a bull market, while a negative or pessimistic market bias will normally see prices driven lower.
“Greed” and “fear” are the extremes of the spectrum, with a bull market drawing in investors who look to jump on the trend, while a bear market rife with those clamouring to cut risk will also attract short-sellers who look to profit from falling prices. When these indicators hit extreme levels, they may also suggest that a market is about to turn as positioning becomes too one-sided, leaving the trend vulnerable to reversal.
Contrarian sentiment indicators can also prove very useful in gauging a market move, as traders look to go against extreme levels of fear and greed.
BEAR MARKETS CAN BE VERY VOLATILE
In a bull market, traders are confident of the market backdrop and are prepared to invest or trade and hold positions for longer. In a bear market, uncertainty stalks the market leaving traders constantly worried about falling prices. If you are short in a bear market, it can become difficult to continue holding your position - and your nerve - due to this over-riding uncertainty and the fear of a sharp reversal. This uncertainty adds volatility to the market as traders can be swayed into buying and selling at levels they would not normally consider, due to erratic price action.
Large price falls can also tempt buyers back into the market – ‘Buy the Dip’ – who then sell their position quickly when prices keepfalling, again adding to negative sentiment and erratic price action. The adage remains true – ‘Don’t Try to Catch a Falling Knife’. Remember it is common to see a short-term bull move in a long-term bear market and the other way around.
TECHNICAL ANALYSIS IS DRIVENBY PRICE ACTION AND NOTHING ELSE
Technical analysis is the use of statistical analysis to help evaluate the price of an asset or market. By using historical trade data, including price and volume, traders can build a chart and see if an asset or a market is undervalued or overvalued and identify timeframes over which these conditions may reverse or extend. Active traders may use charts with timeframes as short as one minute while longer-term investors may use daily or weekly charts to help them determine their view when making a more informed trading decision.
Technical Analysis: Where to Get Started and How it Can Help.
There are many different price trends that can help traders ‘predict’ future moves.
These include:
- Directional price trends – an upward trend with higher highs and higher lows confirms a bull market, whereas a downward trend with lower highs and lower lows confirms a bear market.
- Historical price patterns – many technical analysts look to the past to help predict the future. Does an asset always rally or fall at a certain price level on a chart and if so how many times has this occurred? Does one asset have a direct relationship with another – correlation – and if so, how accurately are the two markets correlated and are there any time lags between moves?
- Volume can help identify market changes – if an asset suddenly reverses direction on a larger-than-normal volume, traders should be aware that a change in direction may be taking place. If the move is on small or normal volume, then a reversal is more unlikely. If the volume in an uptrend is falling, it is likely that the momentum of this move is slowing, another sign of a potential market reversal.
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