Bull Market: How we win in the market
The year 2022 witnessed a bearish trend for many investors. Fortunately, 2023 has shown a different story with more investors predicting this new year will meet a bullish market.
Although the U.S. Federal Reserve failed to announce any official plans to halt the rate hikes yet, the market already put bets on a potential bull market. At the time of writing, the major three US stock indexes, namely NASDAQ, S&P500, and Dow Jones Average, were up 8.79%, 5.02%, and 1.83% respectively YTD. The Hang Seng Index even rose 13.22% YTD, showing a completely different market move from last year when the market was fraught with negative sentiment.
The bull market is definitely good news for investors as they are more likely to earn huge profits. Therefore, understanding the full picture of the bull market is key to guaranteeing you won't miss the opportunity of winning returns. Next, we are going to walk you through the definition, causes, signs, strategies, and any other relevant information to help you ride on the bullish trend in the new year.
What Is A Bull Market?
When stock prices are increasing or are anticipated to rise, it is said that the market is in a bull market. Bull markets are frequently associated with the stock market, while they may also relate to anything that is traded, such as bonds, currencies, real estate, and commodities.
Since the values of securities rise and fall back and forth while they are being traded, the term "bull market" is normally used for lengthy periods during which a sizable part of security prices are rising. Broadly speaking, a 20% rise in stock prices often indicates a bull market.
But, here is the tricky point: the start of a bull market can only be determined in retrospect. In other words, when you confirm the bull market is truly happening, you probably have already missed most of the opportunities for high returns. Thus, understanding the causes, signs, and related strategies of the bull market is essential for investors to predict or identify the bull market.
What Causes the Bull Market?
The bull market often occurs when either the economy is growing rapidly or is already robust. For example, it frequently occurs in tandem with rising business profits, thriving GDP growth rate, and declining unemployment rate. In a bull market, the investor confidence will also generally increase with the rising stock prices. Both the general mood of the market and the demand for equities will be favorable. Additionally, during bull markets, there will also be a general surge in IPO activities.
You may have noticed that some of the aforementioned criteria are easier to quantify than others. Clearly, the business earnings and the unemployment rate may be easily measured in figures, but it can often be more challenging to determine the general tenor of market comments or sentiment. Alternatively, you may identify the market sentiment based on the selling and buying actions of investors. During the bull market, the securities will be in short supply while demand will be high. Few investors will be ready to sell stocks, but investors will be eager to purchase them to earn profits.
What Are The Signs of A Bull Market?
There are various traits that may be observed during a bull market. The signs listed below could indicate the bull market is approaching.
Higher trading volume
Since more investors are prepared to purchase and hold onto stocks in the anticipation of making a profit, the trading volume will go upwards. The higher trading volume will also drive up the stock prices, because investors are ready to pay more for securities in a bull market due to the anticipated possibility of price gain.
Weaker U.S. dollar
The strengthening of the U.S. dollar in comparison to other major currencies is often bad news to the stock market. Investors will turn to the dollar's relative safety as interest rates climb, markets decline, and geopolitical concerns remain. On the contrary, the weaker U.S. dollar, often resulting from declining interest rates, will stimulate economic development and consequently lead to a bull market.
More volatility
Since there are fewer sellers and more buyers of securities during a bull market, there is typically higher market liquidity, which makes it simpler for investors to acquire and sell securities rapidly and at competitive prices. Bull market-performing businesses may decide to reward their shareholders by raising dividends, which can be appealing to income-focused investors. The number of businesses that go public and raise money through initial public offerings (IPOs) may rise during a bull market, giving investors the chance to take part in the expansion of young and promising businesses.
Bull vs. Bear Market: How Are They Different?
In simple terms, the stock prices go up in the bull market, and go down in the bear market.
A bear market, which is the exact opposite of a bull market, is often characterized by declining prices and dim prospects. According to the widely accepted theory on the origin of these phrases, the terms "bull" and "bear" are used to characterize markets because of how the animals battle their rivals. More specifically, a bear swipes its paws down while a bull raises its horns toward the air. These behaviors serve as analogies for market activity: an upward trend indicates a bull market, while a bear market is the one where the tendency is down.
The economic cycle, which includes four phases: growth, peak, contraction, and trough, typically coincides with bull and bear markets. A bull market's beginning is frequently a leading sign of an expanding economy. Stock prices rise regularly even before macro-economic indicators, like GDP growth rate, start to trend upwards because investor confidence about future economic circumstances drives up stock prices. Similar to how bear markets typically begin before an economic downturn takes root, the stock market often declines several months before the GDP really falls.
Investment Strategies for Bull Market
Ideally, those who wish to profit from a bull market should invest early to gain from growing prices and sell their holdings at the market's top. Predicting when the bottom and peak will occur might be difficult, but you may still manage to avoid the big losses and earn high returns even if you just predict the general dates of the bull market. In the section below, we'll look at a few popular tactics adopted by investors during bull market periods. These techniques do, however, contain some risks because it is hard to predict how the market will develop going forward.
Buy stocks and hold
Purchasing a specific security and hanging onto it with the option to sell it later is one of the most fundamental investment methods. This technique inherently requires confidence on the side of the investor. Otherwise, only a few investors will be willing to hold onto a security for a long period of time. For this reason, this purchase-and-hold strategy is fueled in part by the confidence that comes with bull markets. If you purchased promising stocks at a low price during a bear market, then the chances of high returns will also be higher.
Add bets on purchased stocks and hold
This method is a modification of the above purchase-and-hold strategy: investors will put more bets on the stocks already purchased before. The idea behind the increased-purchase-and-hold strategy is that an investor would keep increasing their holdings in a specific security as long as its price keeps rising. This approach entails some risks, because investors need to purchase more stocks at a higher price during the bull market.
Buy stocks after retracement
A retracement refers to a minor pullback or change in the direction of stock price movement. Retracements are temporary in nature and do not indicate a shift in the larger trend. This means the stock price falls temporarily, but does not deviate from the general bullish trend. Stock prices are unlikely to keep rising even in a bull market. Instead, despite the main rising tendency, there will probably be shorter time frames with minor declines as well. In a bull market, some investors keep an eye out for retracements and act to purchase stocks at a lower price during these times. This approach is based on the assumption that the bull market will continue and that the price of the asset in question will swiftly increase again, giving investors discounts for purchasing stocks.
Frequently Asked Questions
What causes the bull market?
- When stock prices are increasing or are anticipated to rise, it is said that the market is in a bull market. The bull market often occurs when either the economy is growing rapidly or is already robust.
What are the signs of a bull market?
- There are various traits that may be observed during a bull market, such as higher trading volume, weaker U.S. dollar, and more volatility.
How should I invest in a bull market?
- There are a few popular tactics adopted by investors during bull market periods. You may choose to buy stocks at low prices and hold them during the bullish trend, put more bets on the stocks already purchased before, or purchase stocks after a retracement.