Characteristics of Bull and Bear Markets
In reading or listening to financial market news, you may have heard of the term 'bull market' or 'bear market'. While these terms are thrown around quite often, what do they mean? Well, the traditional technical definition is as follows:
Bull Market: An advance of 20% or more from its previous or recent low.
Bear Market: A decline of 20% or more from its previous or recent high.
Today I ask, is it that simple or is there more than meets the eye?
Below I present 5 characteristics of both bull and bear markets.
A greater number of shares advancing versus those that may be declining. In addition, a greater number of shares trade above their 200-day moving averages
The largest shares by market capitalization make the largest percentage gains. To use a sports analogy, the best players will often be scoring the most points.
Defensive sectors lag. Safe-haven sectors such as Consumer Staples, Utilities and Healthcare take a back seat as investors gobble up growth shares which have exposure to Technology, Software, Artificial Intelligence, and Electric Vehicles to name a few.
Stocks continuously trade in high bullish momentum or overbought ranges. I've always said that sometimes, overbought can be a good thing, especially if you are looking for strength. While overbought is often associated with reversals, overbought readings may be indicative of high demand for shares and hence bigger moves to come.
Elements of scepticism lead to bears throwing in the towel which leads to further buying and higher stock prices.
A greater number of shares declining versus those that may be advancing. In addition, a greater number of shares trade below their 200-day moving averages
The largest shares by market capitalization make the largest percentage losses. The best players will often be scoring their own goals on the day (a large percentage of decliners). In addition, market breadth tends to deteriorate.
Defensive sectors lead. Safe-haven sectors such as Consumer Staples, Utilities and Healthcare are bought while investors avoid growth shares such as Technology, Software, Artificial Intelligence, and Electric Vehicles to name a few.
Stocks continuously trade in weak, high bearish momentum or oversold ranges.
Near certainty by market participants that stocks will continue to decline indefinitely.
How To Navigate A Bull Market:
Buy stocks which show or have started to show relative strength.
Trade tactically by recognizing overbought conditions, then taking profit on buy/long positions.
Buy the leading sectors such as Technology, Financials or in some cases, Energy.
Add Beta: Buy shares that are set to rise by a greater percentage than the market.
How To Navigate A Bear:
The same as in a bull market, buy stocks which show or have started to show relative strength.
Trade tactically by recognizing extreme oversold conditions, then taking buy/long positions for short-term rebounds.
Look for opportunities to sell shares that are starting to or are currently showing relative weakness.
Buy the defensive sectors such as Consumer Staples, Utilities or Quality from a factor perspective.
Add Low Volatility Stocks: Buy shares that are set to decline by a lower percentage than the market.
Seek opportunities to add quality companies to a long-term portfolio. The best long-term opportunities are presented amidst extreme fear.
In both, bull and bear markets, look for opportunities to trade on both the long (buy) and short (sell) side. In some cases, a market-neutral approach may be the most appropriate.
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