2-06 Bull vs. Bear Markets

chapter2-6aBull and [ts]Bear Markets[tm]A prolonged period of pessimism and falling stock prices that seems to feed on itself and generates even more pessimism and even lower stock prices.[te] play a strong role in extending or ending [ts]business cycles[tm]The typical business cycle consists of periods of economic expansion, contraction (recession) and recovery to a new peak.[te]. Millions of words have been written about Bull and Bear Markets, but here is what you need to know:

  • When a [ts]Bull Market[tm]A prolonged period of optimism and rising stock prices that seems to feed on itself and generates even more optimism and even higher stock prices.[te] exists, the majority of investors feel very positive about the current business cycle, the stock market, and the overall condition of the U.S. and/or global business. More and more investors leave the spectator position and get in the game by buying stocks. More investors mean more money in the market. More money in the market usually translates to more buying activity and higher stock prices. This is a perfect example of supply and demand in action.
  • Bear Markets indicate the opposite philosophy of large sectors of the investment community. Investor confidence is down and the community perceives that the current business cycle is at or in a downturn. Many investors tend to become spectators, not players, and sell stocks. They are fearful about the prospects for investing and as money leaves the market, stock prices tend to drop. Investors then take their cash and usually buy safer investments like U.S. Treasury and Corporate bonds. (Bond prices then rise, making their yields less attractive, thereby slowing the exodus from the stock market.)

The reason why these two market extremes are called “Bull” and “Bear” is not clear. Some say that a Bull wants to “buck up” prices while the Bear wants to “claw down” prices. In any case, the Bull and Bear are iconic symbols on Wall Street that are continually fighting each over for control over the market’s overall direction.

As an investor, you need to know who is winning this battle between the Bull and the Bear and invest appropriately. Once you understand the trend – Bull or Bear – treat the trend as your friend.

This cliché, “the trend is your friend”, is one you must remember. If we are in a Bull market and the trend is up, then it is a perfect time to buy low and sell high. In a Bear market, the trend is also your friend, and there are ways to make money when stock prices are declining.

[mark]”The trend is your friend” and “buy low and sell high” are great clichés to remember. In a Bear market, another cliché is “sell high and buy low”. This is called Selling Short and this topic will be discussed next in Chapter 3. Also, another hot cliché is to “buy high and sell higher.” This one is about identifying stocks with strong momentum and that are breaking out of a narrow trading range—more about Momentum Trading in Chapter 8.[endmark]

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