Are we in the bull market? When one talks about stock markets one often hears the words bull and bear market.For example India’s Bombay Stock Exchange Index, SENSEX, was in a bull market for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points.  This article tries to answer What is the bull market? What is bear market? Why are they called so? How many bull markets have been in India ? How does bear market differ from correction or pullback?

What is Bull Market? What is Bear Market?

A bull market describes an upward trend among a specific market or group of securities that is rising in value or is expected to rise in value in the future. While a bear market describes a downward market trend over time with prices declining or expected to decline in future.  During bear markets, markets are said to be in hibernation and the prices assets in these markets are either in decline or expected to be in decline in the future. Bull and bear markets usually extend over years as they describe long-term trends, not short-term changes. Sudden rises or drops in stock prices are called spikes. The unofficial definition of a bear market is that stocks prices should drop by at least 20 per cent over two months or more. India’s  SENSEX, was in a bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Example of Bear market In India are, the stock market crashes of 1992 and 1994  and the dotcom crash of 2000 . The Great Depression of the 1930s is the famous example of bear market in US.  Our article Ups and Downs of Sensex covers journey of Sensex.

• Though mostly during discussion of stock markets references to bull or bear markets are made, bull or bear market applies to all other investment such as gold,bonds, as long as prices are increasing or decreasing. While in 2014 stock market in India was climbing gold is in bear market.
• The terms bull market or bear markets can be used to describe the overall market, or even sections or sectors of the market – for example, the market is bullish on banking stocks. Bulls and bears can co-exist for example, the market is bullish on banking stocks and bearish on infrastructure stocks
• Like all other markets bull market or bear market does not lasts forever as no market can last forever. Some bear markets last much longer such as Japanese stocks which hit high in 1989 and is still below.
• It is difficult to predict as to when the bull market or bear market may end.

Bull markets are usually preceded by general optimism, upbeat expectations and investor confidence. In the early stages, many of the market changes are psychological and may not or may not be accompanied by strong economic data or corporate earnings.  Bull Market is also termed as Bull Run. In bear markets, increasing pessimism and decreasing investor confidence are the prevailing sentiments.   As the market is determined by investors’ attitudes, how investors feel about the market and the ensuing trend is also denoted by bullish and bearish approach.  It’s difficult to predict when the trends in the market will change. The Psychology of Market cycle  is shown below

Psychology of Stock Market Cycles

Why are Bull Market and Bear Market called so?

The actual origins of bull market/bear market are unclear. These were reportedly used to describe investors at least as far back as the late 1700s in the book Every Man His OwnBroker, written by Thomas Mortimer. The Online Etymology Dictionary says the Germanic root of the word bull meant to blow, inflate, [or] swrelates the word bull to inflate, swell.  Some analogies are as follows:

• It relates to the speed of the animals: bulls usually charge at very high speed whereas bears normally are thought of as lazy and cautious movers (It’s actually a misconception because a bear, under the right conditions, can outrun a horse.) Bull symbolizes charging ahead with excessive confidence whereas bear symbolizes preparing for winter and hibernation in doubt.
  
• Derived from the way in which each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down.
• Due to the once-popular blood sport of bull-and-bear fights in England in 1500s, the term bull stands as the opposite of bears.
• They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes.
• Historically, the middlemen in the sale of bearskins would sell skins they had yet to receive. As such, they would speculate on the future purchase price of these skins from the trappers, hoping they would drop. The trappers would profit from a spread – the difference between the cost price and the selling price. These middlemen became known as bears, short for bearskin jobbers, and the term stuck for describing a downturn in the market.

Image below shows the bull markets in India From Livemint’s  What the past 6 bull runs tell us about this market (Click on image to Enlarge)

Bull Markets in India

Herd, Pig, Chicken of Stock Markets

Another common term used in Bull Market or Bear market is herd, which is used for a large group of market participants or investors in the financial market. Herd behaviour, is the tendency for individuals to mimic the rational or irrational actions of a larger group. Individually, however, most people would not necessarily make the same choice. Large stock market trends often begin and end with periods of frenzied buying or selling .  Individual investors join the crowd of others in a rush to get in or out of the market. Example of Herd behaviour is the late 1990s when everyone venture capitalists,private investors and individual investors were frantically investing huge amounts of money into internet-related companies, even though most of these dotcoms did not (at the time) have financially sound business models.

Chickens are afraid to lose anything so they are full of fear to step into the market . Their fear prevents them from taking any decisions, risks. While it’s true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk,

Pigs are high-risk investors looking for the one big score in a short period of time. They get impatient and greedy about their investments and as they have insufficient knowledge they are not fully aware of the ins and outs of the markets. Their greed turns into irrational exuberance, which makes them overlook the obvious risks. Pigs buy on hot tips and invest in companies without doing their due diligence . Most often, they suffer heavy losses in the markets. Professional traders love the pigs, as it’s often from their losses that the bulls and bears reap their profits.

Both Bulls and Bears make money, while Chickens get waylaid and the Pigs are slaughtered

What is Correction, Pull back and how they differ from Bear Market?

A bear market should not be confused with a correction or pullback.

Bear market is around 20% fall in the market sustained for a couple months

A pullback denotes a brief single-digit decline. Typically defined as a 5% dip from a recent high, and often times seen as a buying opportunity during an ongoing bull market

Corrections are short-term drops refer to a decline greater than 10 per cent but less than 20 per cent . It  is a short-term trend that has a duration of less than two months

Bubbles is when assets rapidly rise in cost far above their true value, only to later  to burst, whether it be real estate, commodities, stocks, bonds, technology, etc. In bubbles too many investors become eager to buy.  thinking that they too can profit from the run-up. As demand becomes more  than supply prices rise too quickly to be justified or supported by an actual value of the company or asset. Eventually, some investors ,often those who got in on early recognize that the rising trend is unsustainable and start selling off. Other investors quickly catch on and start dumping their shares or assets, hoping to salvage their investments as well. But, because fewer people want to buy into a declining market, prices plunge and those who entered the game late often suffer substantial losses. In short, as the market begins correcting itself, the bubble deflates or in more extreme cases, it bursts.

The Dot-com Bubble was a speculative bubble in US from the mid to late-1990s in the shares of early internet companies called Dot-coms. Technology company stocks in the  US Nasdaq stock index soared to incredible heights. Many Dot-com companies went public even though they had negative earnings or astronomically high business valuations. In early 2000, the technology stock bubble crashed  when Nasdaq dived from 5,000 to nearly 1,000 by 2002.

There is no specific definition of crashes, although they are characterised by rampant selling.Historically, a market crash has always precipitated from a bubble

Related Articles :

• Understanding Returns: Absolute return, CAGR, IRR etc
• Stock Market Index: The Basics
• Comparison of Fixed Deposits and Sensex Returns

History has shown that the stock market always rises over the long term. Bear markets and crashes happen, but the market in India have always mads a comeback and eventually rose higher than it ever was before. Will the ache-din trend continue? Only time will tell? What do you say?