What is the difference between bull markets and bear markets?
Dow Industrial average long-term chart

If you are a complete beginner reading this, don’t feel bad if you don’t know what this means. A bull or bear market, in really simple terms, is the way Wall Street describes a good market or a bad market. The main reason why I think it is important to learn these terms is because professional annalist talks in old traders lingo or have studied finance as a profession. Other times, they are people who professionally look at investments and give you ratings or report the finical news.

Bull Market

As you can see by the chart above the bull markets are symbolized by the green arrows. This is during a time when the market is in an uptrend overall. There are a few things that I want to point out about a bull market.

  • An uptrend
  • The media has a bias toward bull markets
  • Trough to the Peaks

Bear Market

When the market moves downwards for a period of time the market is described as a bear market.  This is the red arrows on the chart above that I have used as an example.

  • A Down Trend
  • The media acts like the world is ending
  • Peaks to the Trough

Bull and Bear Markets are Long Term Trends

This is a term that refers to the markets in the long run. (My way of saying greater than a year) Of course, there are going to be times when the bull market dips or times when the bear market has a short-term uptrend; however, this is a short term occurrence and only lasts in the short run. The example chart I use goes from 1996 all the way to 2016 which is a period of 20 years.

Look at the chart and notice that the bull markets last longer about 5 years on average. On the other hand, the bear markets are on average two years. From this you can see how much faster the markets drop then go up in price.

 A Reflection Macro Economic Trends

To an extent, the stock market reflects the economy with the exception of the last bull market which was manipulation through the federal reserve. The last bull market following 2008 has much more to do with near zero interest rates and the FED pumping easy money into the economy. This was due to the extreme circumstances and was extreme measures to get the economy running again.

As a general rule of thumb, bull markets normally happen when the economy is going through a growth stage. During a bull market, the economy is doing well, with corporate earning increasing and unemployment rates at a low amount. Bearish markets normally happen throughout times of economic slowdown. If we think back to 2008 everyone was scared and this creates bear markets. Unemployment normally goes up and cooperate earnings are struggling.

How Can You Make Money With This Knowledge?

As the famous trader, Larry Williams says, The trend is your friend. When you can clearly see that there is a bull or bear market it doesn’t make any sense to fight the overall trend. This means that you should think up strategies of going long in the bull markets and going short during the bear markets. Like I said before, there are going to be short term reversals in the markets. These are times to take positions when the market is going against its overall trend.

Another thing that people will often say is that short sellers always loose. I don’t think that is true but think about your probability of being right on a long position vs short position. This is the overall trend of the markets, so there will be stocks that under-perform and lose value and short sellers somehow find them. There are profitable short sellers out there, but it isn’t a strategy for the beginner trader.