You’ve just learned why prices rise and fall in the stock market. Time to dive deeper into this topic with the biggest of all predictors: bull and bear markets.
What Is a Bull Market?
A bull market is a pronounced uptrend for a financial market that lasts for months, and often for years. While bull markets can occur in bonds, commodities, and other financial assets, in this case we’re referring to the stock market. When we say stock market, we’re referring to key worldwide indexes such as:
- The S&P 500
- The Dow Jones Industrial Average
- The Financial Times Stock Exchange 100 (FTSE)
When those indexes see big gains over an extended period of time, that’s a bull market. Let’s take a closer look at the key traits of bull markets, and what causes them.
How Do We Know We’re in a Bull Market?
Typically, we define a bull market as starting with a 20% rise in stock prices, following a decline of at least 20% before it. There have been 13 bull markets since the end of the Great Depression. The four biggest bull markets since that milestone are:
- 2009-2020 Bull Market. When U.S. President Barack Obama bailed out failing banks and launched an economic stimulus program, the market responded by shaking off the financial crisis and surging higher. The S&P 500 ended up quadrupling over the next 11 years.
- Post-War Recovery. With war rations ending, peace setting in, a baby boom arriving, and aggressive infrastructure programs starting, the United States enjoyed an extended run of prosperity after World War II. Starting in June 1949, a bull market propelled the S&P 500 up 266% over a period of 86 months.
- Recovery from the Great Depression. The stock market crash of 1929 brought the Roaring ‘20s to a screeching halt, ushering in the start of the Great Depression. Starting in June 1932, the S&P 500 soared 325% over a span of 57 months. Aggressive currency devaluation, monetary expansion, and government stimulus spending helped make it happen.
- Roaring ‘90s. Buoyed by a boom in the technology sector, the economy and the stock market both took flight in the 1990s. The most profitable bull market of all time started in October 1990, lasted more than nine years, and delivered a mouthwatering 417% return.
Common Traits of a Bull Market
Bull markets typically occur when the economy is strong, and/or getting stronger, as defined by key factors such as gross domestic product (GDP) growth, jobs growth, and corporate earnings growth. Investor confidence will rise during a bull market. That will in turn trigger more aggressive corporate ambitions, such as a spike in the number of initial public offerings (IPOs).
The bull market of 2009-2020 was a bit more complicated. The financial crisis of 2008 triggered a stock market crash and panic on Wall Street. But the U.S. government acted quickly to bail out big banks and enact a huge economic stimulus package. Those factors stabilized the banking industry and shoved stocks into what became the longest bull run in history.
Strategies in a Bull Market
While a bull market is defined as a run of 20% or more following a big decline, that doesn’t mean that stocks are going to go up every day. Even in a big uptrend you’ll still see sellers, whether they’re motivated by fear that the good times will soon end, or that they simply want to take some profits.
One common approach during a bull market is buy and hold. The idea behind buy and hold is to stay disciplined in your investing approach, and hold onto your shares even when the market fluctuates. Fluctuations are normal, and shouldn’t knock you out of your positions if your goal is to hold for the biggest gains possible.
If a bull market becomes especially powerful and long-lasting, you might even see bigger pullbacks along the way. This leads to another strategy that can pay off during bull markets, which is to buy on dips. Here, when corrections occur during a bull run, you take advantage by snatching up more shares. You don’t flee, unless ample evidence emerges that the bull run is about to end.
Finally, you can use an increased buy and hold strategy, also known as pyramiding. Here, instead of buying on dips, you’re buying more shares as the price of your stock rises. This can be a highly effective strategy during a big bull run, but it must also be done with care, where you buy fewer shares on the way up than you did with your first purchase.
For instance, if you buy 100 shares of a stock for your initial purchase, you might consider adding 10 or 15 shares at a time each time you implement the pyramiding strategy. That way, if the market turns south, the size and strength of your initial position will still ensure gains.
Swing Trading or Day Trading in a Bull Market
If you prefer short-term trading to long-term investing, that too can be a winning strategy during a bull market. In this case, you’re following the market closely every day throughout the day, and looking to take advantage of shorter-term price swings to make quick profits. This can even include short-selling, in which you bet on the price of a stock to go down. That might seem counterintuitive during a bull market, but remember, fluctuation will still occur, even during a healthy bull run.
How to Know when a Bull Market is Over
By definition, a bull market ends when a 20% drop in stock prices follows that 20% (or larger) uptrend. However, you can start to see signs of a bull market unraveling before that. Such signs can include increasing weakness in the economy (i.e. slowdowns in GDP and jobs growth), earnings shortfalls among market-leading stocks, and signs of technical weakness like market averages falling below key price levels. Those price levels can include numerical milestones or moving averages, which are lines that follow longer-term market price movement, in denominations of 50 or 200 days.
Congratulations, you now know all the basics about bull markets. If you’re ready to jump to the next lesson on bear markets, keep reading. If you’d like to learn more about general stock market theory first, peruse the other articles on our site.