Understanding bull markets is a key to the success of any investor. This article is going to explain what a bull market is and offer some tips when investing in a bull market. It will also cover several investment strategies that are used by investors to adjust security holding positions during these periods.
What is a bull market?
A bull market is a term that describes a group of securities that are expected to rise or are already rising. The main characteristics associated with bull markets are a belief that positive results will continue – investor confidence and optimism.
How do you identify bull markets?
This section will focus on the main ways to identify bull markets. Some of the primary market indicators used to identify bull markets include moving averages, advances and declines, volume and momentum indicators.
1: Moving averages
Moving averages are a type of technical analysis that aims to reduce fluctuations that occur as a result of temporary price increases and decreases. The most common moving average figure is called simple moving average and the more advanced version is exponential moving average.
2: Advances and declines
Advances and declines are the number of stocks that closed higher and the number of stocks that closed lower than the previous day’s close. These numbers are used by analysts to help determine the overall sentiment of the stock market. Bull stock markets have more advances than declines.
Volume is a measure of all the trades that were completed for a given period of time. These numbers have a direct impact on the overall effect of price increases and decreases on a given stock. Bull markets typically have a large amount of trading volume over extended periods.
4: Momentum indicators
Momentum is basically a measurement of the speed of price changes that occur for a stock. It tends to have a much greater impact on rising markets that occur during bull periods than it does in falling markets. This figure is usually tied to the relative strength index to help measure the overall movement of stocks for a specific period.
How do you invest in a bull market?
Prepare for the next bull market while prices are still falling.
Bear markets are invariably followed by bull markets. While prices are falling, concentrate on raising cash and developing a wish list of stocks (and their target prices). Bull markets tend to begin abruptly while things appear gloomiest. The end of the world is upon us. Then suddenly a bull market begins. Be ready by saving as much as you can. Cut down your discretionary spending and raise as much cash as possible. Watch for a bull market to begin in the depth of a recession, when everything is still in free-fall and the economic outlook appears the darkest. If you wait until a recession is ‘officially’ over, you will probably miss a big portion of the bull market’s gains.
Early in a bull market when prices have just started to bounce back from the bottom, consider all kinds of stocks but look closely at those that have fallen the most during the bear market, typically cyclical stocks.
Cyclical stocks are dependent on the business cycle, so they tend to be hardest hit in a recession and can be expected to bounce back dramatically when the recession ends. Take a long look at stocks that belong to the hardest hit industries and sectors during the bear market.
Keep buying stocks.
Hold on to your positions as the bull market develops, transitioning from early- to mid-phase. During the mid-phase of a bull market, the economic outlook may remain poor but it will gradually seem less poor. Investors will begin to realize that improvement is taking place and they will bid stocks up to their fair values. Fear of a ‘double dip’ will continue to keep prices in check for a while and a sizable number of investors will remain sceptical of the rally. The mid-phase is usually the longest phase of a bull market and can last for many years. As long as scepticism in the market’s recovery remains, the bull market will continue to rise slowly. That’s the time to hold on tight to
As the bull market continues to rise during the mid-phase, shift your focus more to high-quality stocks.
As the bull market matures, risk increases along with asset prices. The hardest hit stocks tend to recover a lot more than higher-quality ones. Lower-quality stocks may go up by 300 percent to 400 percent while higher-quality stocks are rising only 50 percent to 100 percent. As stock prices go up, however, risk increases, so you should dial down risk by concentrating on high-quality companies.
Investors using this strategy seek to benefit from temporary drops in investment pricing. During periods where stock prices temporarily fall, they purchase additional shares at a discounted rate. The goal of this strategy is to increase your holdings during periods where stock prices drop in hopes that they will continue their upward trend at a future date.
Sell when everyone wants to buy.
Sell your lower-quality and cyclical stocks if you still have some. Long-term investors should hold on to high-quality, defensive (consistently dependable) stocks.
You should now have a sound understanding of what is a bull market. Use the tips outlined in this article to help identify when one is occurring. When you identify a bull market, consider the investment strategies we covered to help you adjust your holdings as needed. Remember to always plan for the long-term to help reduce your overall financial risks.