When stock prices rise, often by about 20%+, driving economic growth and high investor confidence, it is typical of a bullish market. In contrast, when prices decline by around 20% or more from a recent high, it is a bearish market, driven by a sluggish economy and prevalent pessimism. 

Bullish: Signals optimism

Bearish: Signals fear or panic selling and pessimism

  • Stock prices rise continuously over time alongside high employment levels and strong economic growth in a bullish market
  • Historically, bullish markets have lasted more than 4 years on average, delivering average returns
  • Investors should still maintain a diversified portfolio even if the bullish markets offer growth in assets

ACMT FACTS: Bullish markets last longer than bearish markets and show a general upward trend. 

OVERVIEW

Times are modern, and those even before dealing in the stock market are familiar with the terms bull and bear, which indicate sustained price increases or decreases, positive or negative investor sentiment, and associated economic conditions. Therefore, a bullish market represents an increase in price while a bearish market indicates a fall in price (of assets). According to prevailing conditions, the market can be bullish or bearish, pushing prices up or down. 

As investors, it is extremely important to understand trends, as they influence investment decisions and make market navigation highly effective. 

MAIN DIFFERENCES BETWEEN BULLISH AND BEARISH MARKETS

There are certain additional market conditions to be aware of, although the stock prices determine whether they are bullish or bearish. 

Demand and Supply 

Bullish MarketBearish Market
Weak supply but strong demandStrong supply, weak demand
Investors buy securities but do not sell themPeople want to sell their securities
Share prices rise Prices tend to drop 
Investors compete to buy available equitiesDemand is lower, and supply is higher

BULLISH MARKETS

In a bullish market, economic conditions are generally favourable, and prices are on the rise, and in a bearish market, the economy is broadly in recession, and prices decline. That being said, investors’ attitudes typically drive financial markets, signalling upcoming economic trends and investor sentiment. When there’s a consistent price rise during the bullish market, investors tend to have faith in the upward trend. They also believe that it will continue over the long term. However, if you look at the broader business landscape, employment levels are higher and economic growth is steady. 

Causes of Bullish Markets

A raised investor confidence, alongside strong economic indicators, is a primary driver of a bullish market. With robust economic growth for support, and an expanding GDP, employment and increased consumer spending are significant boosters. There is a surge in demand for stocks as businesses report higher earnings, triggering investor optimism. 

Experiencing a sustained bullish market would also mean that the monetary policy is favourable. For instance, a country could announce a lowering of interest rates, which in turn means cutting borrowing costs and encouraging customers to apply for loans. Spending and investment increase, and an influx of capital stimulates the economy, driving corporate profits and making stocks more attractive to investors. 

Psychological factors are also big drivers of bullish markets. Market sentiment is activated with positive news or technological advancements. A sense of optimism is created with strong corporate earnings, and investors are willing to spend more, expecting continued growth. Asset prices, thus, inflate with this collective confidence. As long as the underlying economy remains favourable, a bullish market is sustained. 

ACMT OBSERVATION: Too much optimism can cause irrational excitement, which can lead to price bubbles in assets. 

BEARISH MARKETS

In contrast with bullish markets, bearish markets always decline. Fairly enough, if the fall is more than 20% from recent highs, it is considered a true bear market. Share prices drop, and with this downward trend, investors expect it to continue and adopt a pessimistic outlook. The economy is sluggish, unemployment is at an all-time high, and companies tend to lay off workers. 

Causes of Bearish Markets

Causes of a bearish market include economic downturns and external shocks that make investors feel pessimistic. GDP is declining, unemployment is rising, and consumer spending indicators are also declining. Companies aren’t making much money, and growth is slowing down. With anticipated non-profitability, investors begin selling off their stocks, and the market spirals downwards as well. 

Another cause of the bearish market is most commonly attributed to tight monetary policies, rising interest rates by banks to fight inflation, and increased borrowing costs for businesses and consumers. Economic growth is dampened by lower spending and investment. Companies struggle with declining revenue and rising costs, while investor confidence plummets, and they see selling assets as the only solution. 

Pandemics, natural disasters, and geopolitical tensions can be other leading causes of bearish markets. Because these events spark uncertainty and risk, investors tend to shift their capital into safer assets, such as gold and bonds. Stock prices experience a decline with this move away from equities. Falling asset prices can also be triggered by feedback loops that drive a bearish market, caused by reduced spending and a consequently weakened economy. 

IDENTIFYING THE DECLINE OF THE BEARISH MARKET

Those in the business of stock trading must be able to predict the end of the bearish market and the beginning of a bull run. There are certain signs you must look for that suggest that the market is on its way to recovery. Check economic data. You will see a rising GDP and decreased unemployment. Thus, consumer spending increases, and the downturn could finally be over. 

Banks lower their interest rates to stimulate the economy and boost economic activity, fostering investor confidence. 

Watch market sentiment as fear and pessimism among investors decline, as reflected in the VIX (Volatility Index). Confidence returns to the market and buying activity increases, especially among institutional investors. Participants prepare for recovery after asset prices have fully bottomed. 

PRO ACMT TIP: The market watch does not end there. You may still have to keep an eye on the sentiment and identify the lowest the current market will touch. If the media is depicting a rosy picture of recovery, then it has only just begun, and you must exercise caution. 

Conduct a technical analysis and read chart patterns to gain the best insights into the anticipated end of the bearish market. Double bottoms, reversal patterns, and bullish divergences must be studied for momentum indicators such as the relative strength index, which can indicate a shift in market direction. The market also strengthens when market breadth widens, and more stocks trend upward. 

WHAT ABOUT INVESTOR PSYCHOLOGY?

While the stock market itself might seem like a technical genre, it primarily swings depending on the investors’ moods. It is their actions and beliefs that shape the market and its behaviour. That is why psychology is vital to the stock prices. When the market is bullish, investor optimism rises, and making money seems like a mass movement. This creates an invisible circle of confidence. As investors continue buying in, prices rise, which in turn encourages them to invest. 

PRO ACMT TIP: Greed and fear are two of the strongest emotions felt when trading in stocks. While you can never eliminate them from your system, you can recognise what drives your decisions. 

Now, the bearish markets work inversely. It is as if storm clouds have gathered and there’s going to be a heavy downpour, and people are running for cover. Prices begin to fall, and investors, worried that they will lose their money, sell their stocks and choose safer investments such as bonds. As prices enter a downward spiral, investor confidence erodes, and panic selling ensues, pushing prices even lower. 

Understanding this psychological state of mind, which is rather cyclical, you will be able to comprehend why markets can move beyond the economic calculations. Experienced investors wait and watch. They identify signs that go beyond mere numbers and track market sentiment that swings from one extreme to the other. 

SO, WHAT HAPPENS DURING A CRASH?

To understand a stock market crash, check the adjoining figure as featured by the S&P 500 index during the financial crisis of 2008. 

In a gist, the entire crash was triggered by adjustable-rate mortgages held by homeowners who went beyond what they could afford. It was a sudden economic downturn because money was not being spent or dissipated. Years of ultra-low mortgage rates boosted the availability of mortgages, which in turn led to high-risk loans. These were ideally affordable due to the low interest rates. Then came the crisis. Interest rates were adjusted because the low levels were becoming unmanageable, leading to default by borrowers, who could not afford to pay the high rates. 

Furthermore, these high-risk loans were securitised into MBS (mortgage-backed securities) by financial institutions and sold to investors. As interest rates increased, defaults rose, housing prices fell, and the value of MBSs plummeted, sending shockwaves across the financial landscape. So, there it is. 

If the average investor cannot predict this, then how can they gauge market changes?

Stock exchange participating businesses contribute to the broader economy, which is, in turn, linked to stock pricing. Now, bearish markets are typically associated with weakened economies, during which businesses do not record profits. This is because consumers are not spending. Thus, when profits decline, the market value of stocks falls too. The bullish market works in reverse: people spend as the economy strengthens. These are marked changes in economic activity. 

In the above case, investors could have predicted the crash by identifying the rapid acceleration in home prices and recognising that the bubble was unsustainable. The housing bubble was overheating, and there were infusions of complex financial instruments, such as MBSs, that were opaque. The key warning sign was the introduction of adjustable-rate mortgages. 

ACMT OBSERVATION: Incidentally, there were early warnings. But the investors ignored them, driven by high optimism – they assumed the uptrend would continue. That is why using prudence, judgement and psychological constraints are important. 

THE EFFECT OF BULLISH AND BEARISH MARKETS ON STOCK RETURNS

The effects of bullish and bearish markets last depending on the length of time they persist. While bullish markets average a positive return on investment (about 151.4%), bearish markets average a loss (about 31.7%). 

Then how can investors profit in a bearish market?

ACMT teaches you strategies designed to work in a declining market. One way to profit is through short selling, in which investors buy and sell at the prevailing price. They hope the stock prices will fall later and they can buy them. Of course, these are returned to the lender at a lower price later, and the investor makes a profit from the price difference. 

Another way to profit is by purchasing put options, which give the investor the right to sell the security at a preset price. This way, they can benefit if the security price falls. 

PRO ACMT TIP: These are high-risk trading strategies and not suitable for all investors. Speak to your mentor before you employ these. 

THE BOTTOM LINE

Make informed investment decisions once you fully understand the nuances of bullish and bearish markets. When economic growth is robust, monetary policy is flexible and accommodative, and investor sentiment is positive, you will experience a bullish market. You can profit from rising asset prices by focusing on momentum investing and strategic asset allocation. Set clear investment goals while diversifying your portfolio and reducing risk. 

If you are unsure, don’t trade. Get a course from ACMT about technical analysis and options trading to learn the ins and outs of stock trading. With our learning, you can always pursue value investing and adopt a cautious investment approach.

ACMT’s COURSES

All courses are designed and delivered by Mr. Arun Gupta, a seasoned trader based in Jaipur. A veteran trader and stock market guru, he has consistently offered students some of the best and most practical guidance they need, absolutely free. Check out ACMT’s Instagram account to learn more about what you can learn from these easy-to-understand snippets. 

ABOUT THE AUTHOR

Mr. Arun Gupta is a leading stock market trainer and trader who practices in Jaipur. For him, it’s not just about conventional trading. It is about applying proven methods alongside modern technology and prudence that makes a successful trader. He delves into the why, what, how, and when of stock trading using the best combination of historical analysis and practical investing. With decades of experience, expertise, and learning, Mr. Gupta today guides millions through the complexities of the stock market. 

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