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Bull Market

Bull MarketAlong with the bear market, market top, and market bottom, a bull market refers to the key market trends.

What Is a Bull Market?

This term is used to describe the upward trend of stock market prices. The trend got its name from the way a bull attacks its prey, i.e. by moving upward. It is typically opposed to the bear market, which describes the market decline and got its name from a bear attack with the downward movement.

Bull markets tend to happen when a country’s economy is growing stronger or is already strong. They typically occur in line with strong GDP, high employment rates, and a rise in corporate profits. A rise in investor confidence also contributes to the BM. In a bull market, investors are more willing to participate in the stock market and gain profits. Additionally, there is a general increase in IPO activity during BMs.

The most common definition of a BM is a situation when stock prices rise by 20%, typically after two declines of 20% each (bear market). Bull markets are difficult to predict so the analysts can recognize this trend only after it has happened. There are many types of BMs: stock, gold, bond, and secular (long term, lasting 5 to 25 years). The stock BM is driven by the top line revenue, profit, and P / E ratio.

History of Bull Markets

Bull markets typically last longer than bear markets. On average, the last 4.5 years. The current BM has been going on for almost 10 years.

Here is a list of the most remarkable bull markets in the S&P 500 index since the Great Depression:

  • 1932 – 1937: Recovery from the Great Depression.

  • 1942 – 1946: World War II. Because of the war effort, American factories built up the production of military equipment.

  • 1949 – 1956: Postwar economic boom.

  • 1959 – 1961: Cold war, when the stocks were overvalued.

  • 1962 – 1965: John F. Kennedy aims to “get America moving again”.

  • 1966 – 1968: The economic growth era. This was the shortest BM in American history but the S&P 500 still managed to grow up by almost 50%.

  • 1970 – 1973: Nifty Fifty – the time of fifty popular large-cap stocks on the New York Stock Exchange, among which were McDonald’s, IBM, Disney, and Polaroid.

  • 1974 – 1980: A modest bull. This was the longest but the weakest BM, with the average annual returns of just 14%.

  • 1982 – 1987: Reaganomics (economic policies promoted by President Ronald Reagan). After Reagan had cut the taxes, the stock market went up, followed by a short bear market of 3 months.

  • 1987 – 1990: The Black Monday comeback. This was the second shortest bull market in the modern era.

  • 1990 – 2000: Roaring 90s. The beginning of the Internet age marked the longest period of uninterrupted economic growth in modern American history.

  • 2002 – 2007: Housing boom. During this period, many Americans could afford to buy homes because of mortgages at short term rates and without a down payment. The growth of the real estate market caused the Americans to aggressively spend money.

  • 2009 – until now: Recovery from the financial crisis of 2007 – 2009.

Bull Market Stages

A bull market goes through the following phases:

  1. Accumulation. This stage typically occurs at the end of the bear market and thus is hard to spot because it can also be a secondary move in the primary downward trend. In addition, the accumulation stage is characterized by persistent market pessimism, when many investors think that everything will get worse. One more characteristic of this phase is a price consolidation period. At the end of accumulation, it can be seen that the market prices start to grow. If the prices no longer go down, the upward trend is finally confirmed.

  2. Public participation. When informed investors actively enter the market after the accumulation stage, the new primary trend moves into the public participation stage. During this stage, business conditions start to improve because of earnings growth and strong economic data. More and more buyers move back in, thus sending the prices higher. This stage is not only the longest lasting but also the one with the largest price movement. Finally, the new upward primary trend confirms itself.

  3. Excess. During this stage, the smart money starts to scale back its positions and the last investors start to enter the market after the large profits have been achieved. The end of the excess stage is marked by a primary downward trend, which then transforms into a bear market.

How to Benefit from Bull Markets

To benefit from a bull market, investors should buy early when the prices are still on the rise and sell the securities when the prices have reached their peak. It is hard to identify the peak prices but still, the losses will be minimal and temporary.

Here are the key strategies that investors use to take advantage of bull markets:

  • Buy and hold. This approach involves buying certain security and holding onto it to sell it at a later date. The buy and hold method works because of the optimism that comes along with bull markets.

  • Increased buy and hold. It is a variation on the buy and holds a strategy that involves extra risk. According to this strategy, an investor continues to add to their holdings in certain security as long as it continues to increase in price. This is achieved by buying an extra fixed quantity of shares for each increase in the stock price of a preset amount.

  • Retracement additions. A retracement is a short period during which the general trend in a security's price is slightly reversed. This involves small drops of price even when the general trend continues to go up. Some investors watch for retracements within a bull market and buy during these periods. Assuming that the bull market continues, the price of the security will quickly move back up, thus providing the investor with a discounted purchase price.

  • Full swing trading. This is one of the most aggressive strategies when investors use short selling and other methods, trying to get the most out of the price shifts that take place in the context of a larger bull market.

Summary

A bull market is a trend that is characterized by the growth of securities prices by 20% and higher, typically taking place after two declines (bear markets) of a minimum of 20% each. It is also characterized by economy strengthening, low unemployment rates, and overall optimism of investors. Since 1932, 13 major BMs took place. An average BM lasted 4.5 years, with an average growth of 177%. The longest BM took place between 1990 and 2000, marking the start of the Internet era. Currently, we are experiencing a bull market that has also lasted for about 10 years. It started in 2009 after the financial crisis.

As a rule, there are 3 key stages of a BM: accumulation, public participation, and excess. The investors typically use the following strategies to benefit from bull markets: buy and hold, increased buy and hold retracement additions and full swing trading.