Understanding Bull And Bear Cycles: A Complete Guide

Both bull and bear markets are parts and parcels of the financial markets’ lifecycle. So, as a trader or investor in the financial markets, you must experience your fair share of these market conditions, and knowing what to do when you find yourself in either of these conditions is crucial to success.

In this article, we take a comprehensive deep dive into the bull and bear market conditions, their nomenclatural history, and how to avoid the downsides that come with them. Let’s jump right in then!

In a bull (bullish) market, the underlying assets are on an upward trajectory in value, and economic conditions are generally favorable. In the bear (bearish) market, the opposite is the case. Considering how easily swayed the financial markets are to investors’ sentiment, these terms also describe the general outlook of investors on the market.

In the equity markets, a bullish sentiment means an increase in the value of the underlying company or organization’s shares. For the cryptocurrency or commodities industries, it indicates an increase in the value of the underlying asset. In Bullish market conditions, investors are often optimistic that the uptrend will continue over the long term.

In bearish market conditions, pessimism and fear rule the psyche of investors, causing them to take less risky bets and sell their holdings. This action typically causes the bearish conditions to pick more steam, which triggers more panic and selling. Round and round we go.

A market gets called bearish after it falls by 20 percent or more from its recent highs.

In understanding the concept of bullish and bearish markets, it is somewhat vital to know how these terms got derived. Sure, both animals represent strength, aggression, and power. However, why is a bear used to signify a downward trend and a bull an uptrend?

The most common reason for the terminologies is in the way these animals attack. Bears swipe their massive claws downwards while bulls thrust upwards with their formidable horns.

The other less common reason originates from far back in time. Bearskin merchants in those days had middlemen who speculated on the future prices of these items in hopes that bear hunters would sell to them at a lower price. These middlemen attracted the name “bears,” which became the phrase used for describing a downturn in market conditions—something these “bears” always hoped for in their trade.

Meanwhile, bulls represented the opposite of bears due to a famous bloodsport that pitted bulls against bears for fun. Because it meant the opposite of “Bears,” the term “Bull” stuck as an upward trend indication.

While a bull or bear market condition typically depicts the sustained movement of an asset price towards one direction, other critical factors accompany them. Below are a few of these factors:

In bullish conditions, demand for the asset increases while supply is weak. Because of this, investors compete to acquire the available amount of the asset, triggering price hikes. Basic economics, if you may.

In bearish conditions, the exact opposite is the case; heightened supply amid dropping demand, causing the asset price to drop.

As mentioned earlier, market actions rely heavily on investors’ sentiment. In bullish conditions, investors feel incentivized to purchase an asset, which increases demand and the underlying asset price.

In a bear market, investors do not feel the need to participate in a given asset and move their money to other markets, causing a drop in the price.

The broader economic activity has a significant impact on the price action of financial assets, as it reflects the financial stability and the willingness of investors to participate.

In global economic downturns—like the recent COVID-19-induced economic crisis or the 2007—2008 financial crisis—the ‘economic wheel’ ceases to function optimally, causing widespread asset declines and panic.

In positive economic climes, the opposite is true as investors have more money to spend and become drawn to more risky assets to obtain larger payouts, which drives and strengthens the economy.

Bull markets typically persist longer than bear markets and can last between a few months to several years. Bullish market conditions also seem to occur more frequently than bearish ones. Reports show that over the past nine decades, market conditions have been bullish 78 percent of the time. Meanwhile, the longest-lasting bull market across industries occurred between 2009 (after the economic crisis) to 2020 (before the COVID-19 pandemic hit), a total of 11 years. This market condition resulted in a 400 percent growth in the stock market.

The cryptocurrency industry enjoyed a massive bull market between October 2020 to April 2021, which saw Bitcoin and Ethereum rally by 535 percent and 1,210 percent, respectively. Interestingly, this bull run occurred during the COVID-19 crisis, which favored some industries, like the cryptocurrency industry, over others, like the stock market.

This event illustrates that economic downturns—though generally bad for financial markets—could benefit some industries.

Bear markets tend to be shorter than bullish ones and persist for a few months on average. While some bear markets have lasted for several years, they tend to go by much more quickly than their bullish counterparts. The longest bear market in history occurred during The Great Depression between 1937 and 1942, and later for 61 months.

The crypto industry suffered its most recent protracted bear market between late April 2021 and late July, causing Bitcoin and Ethereum to fall by over 55 percent and 60 percent, respectively.

Identifying bull or bear trends (at their early or peak stages) is necessary to succeed in the investing/trading space. Identifying these trends is a relatively easy task and requires basic oscillators used in technical analysis.

Oscillators are usually used alongside other technical analysis indicators to ascertain market trends. Some of the most common oscillators include the stochastic oscillator, relative strength (RSI), rate of change (ROC), and money flow (MFI). When trying to ascertain market trends (bullish or bearish), these indicators work best on higher time frame charts, like the daily, weekly, or monthly charts.

By now, you should have a well-rounded idea of what bull and bear markets entail. However, how do you apply this knowledge to your advantage in real-world situations in the financial markets?

Investors take advantage of bull markets by getting on board early, at the beginning phases of the bull runs, and exiting around the peak of the trend. While it is difficult to ascertain with any certainty where a bull run might end, several indications signify a possible flattening of the rally or a bearish turnaround.

Apart from the oscillators put forward earlier, there are several other indicators used to monitor trend developments. One of these indicators is the Fear and Greed Index, an on-chain analysis tool that illustrates the level of investor greed of fear on a given asset.

“Fear” or “extreme fear” conditions typically occur in bearish market conditions and usually signify a potential change in trend to the upside, as the assets become significantly undervalued due to sustained sell-offs. Meanwhile, “greed” or “extreme greed” indicates heightened euphoria by investors and almost always leads to a sharp drop in the underlying asset price as the asset becomes significantly overpriced.

That said, when you observe investor sentiment tilting to either of the extremes, the advisable thing to do is to reduce your exposure in the market/asset. Because of the lifecycle of the financial market, another entry opportunity would present itself, and you get to pick the instrument at a lower price, allowing you to double (or even triple) your investment.

In the financial world, down-trending markets are also profit-making opportunities for intelligent investors. To benefit in bearish market conditions, a strategy known as “Short-Selling “ comes into play. For cryptocurrency, forex, and CFDs, short-selling is as simple as buying the asset. With stocks, short-selling involves borrowing shares in hopes of repurchasing them at a lower price. That said, shorting stocks is a bit riskier than other asset classes, and only seasoned traders should undertake this.

As mentioned earlier, ups (bullish) and downs (bearish) are integral to financial markets, and every trader/investor must experience their fair share. So, it only makes sense to educate yourself on identifying these trends and ride them to profits or cut your losses early.

Nonetheless, keep in mind that most financial industries have positive long-term trajectories, meaning that the markets are bullish more often than they are bearish.

   
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