Understanding common trading terms such as bullish and bearish and the intricacies of bull and bear markets is helpful for analysing stock sentiment for traders.
Both terms, ‘Bullish’ and ‘Bearish’, can be used to describe the sentiment towards individual assets like a specific stock or to refer to the market sentiment as a whole.
While the history of ‘bullish and bearish’ is not entirely clear, the legend has it that the bull – which is also quite prominently depicted in front of stock exchanges such as Wall Street or the Frankfurt exchange as a brass monument – would drive up stock prices with its strong horns. But, on the other hand, the feared bear would use his large paws to hit and depress share prices.
Thus, there has never been a monument built for a bear in front of a stock exchange!
The Columbia Guide to Standard American English by the Columbia University Press, in 1996 by Kenneth G. Wilson, depicted each term with the same definition and that generally speaking, “bullish and bearish are used to describe people, their opinions about the market, and the market itself and its tendencies”.
A bull market is typically a timeframe in which the market is trending up, and prices are increasing. While there is no immediate indication of when a bear market stops and a bull market starts, typically, if prices of a market Index have increased by more than 20% since the last significant low, this Index is said to be in a bull market since that very low.
However, this is not necessarily correct. For example, the market could go up by 20% and not yet not have made a new all-time high.
Such a situation is currently underway in August 2022, when the Nasdaq-100 Index has increased by more than 20% from its recent major low. Although, since it has not made a new all-time high yet, it is still said to be in a Bear market.
It is therefore unclear if a new bull market has started already because the market is up by 20% or if the previous bear market will continue.
A bear market, therefore, is a market where prices have declined more than 20% from their last significant high or all-time-high.
Bear Markets are comparatively rare in recent stock market history. For example, since 1980, there have only been six bear markets with a >20% decline in the S&P 500 Index.
The duration of those bear markets was not longer than five years, meaning after five years the S&P 500 Index had already recovered to new highs.
Insofar, stocks have been in bull markets nearly 75% of all time since 1980.
The longest recent bear market was the decline after the 2008 financial crisis.
The financial crisis of 2007, initiated by the subprime mortgage crisis, resulted in a strong bear market between 2007 – 2009, which led to the S&P 500 Index losing more than 50% of its value between its peak and trough. The Index needed 49 months to recover from the lows and make a new all-time high.
In that comparison, the bear market after the Covid Crisis in 2020 was very short: within five months, the S&P 500 recovered from a 34% decline and reached a new all-time high.
The current bear market in the S&P 500 started in January 2022 and is still ongoing: the S&P 500 has lost more than 23% from its previous high until the low in June 2022. It is yet to be seen whether the bear market has ended or will continue.
Historically, the largest bear market started after the 1929 crash and the subsequent Great Depression: the Dow Jones Index lost nearly 90% between its peak in 1929 and its low in 1933. The market needed 25 years to recover to a new all-time high in 1954.
The Bull Market from March 2009 until the Covid Crisis in 2020 has been the largest recent bull market and the longest bull market in history. The S&P 500 Index increased by more than 400% during that time, primarily fuelled by the continuous rise in tech stocks..
However, the period from 1990 until 2000 gave even more impressive returns: during that period, the S&P 500 Index increased by 417%, again fuelled by a rally in tech stocks. Then, the bull market ended abruptly with the dot-com bubble bursting.
During both periods, these so-called ‘secular’-bull markets coincided with a long period of economic expansion within the United States and globally.
Although, it is essential to note that it is possible to have a bull market without economic growth and similarly, it is possible to have a bear market without a recession.
The term ‘Bullish’ is used to describe market sentiment when the general prevailing opinion is that prices will experience an upward trend and rise. Traders feeling bullish can arise from an accumulation of fundamental or technical factors, such as price action, trading volumes or from analysis of stock sentiment news. Economic indicators also play an essential role in framing people’s market sentiment.
Being bullish is not intrinsically linked to a specific timeframe; a trader could be bullish that a stock price will go up in the coming minutes, hours, days, weeks or months.
However, a bull market refers to a sustained period of expected or realised price rises, typically when the stock prices rise by 20%. However, unlike with a Bear Market, there is no universally accepted percentage threshold for what level a market needs to increase to qualify as a bull market. A bull market is simply the period between two bear markets.
Bull markets are characterised by trader confidence that price rises can be sustained for an extended period of time. As such, bull markets are seen as times when optimistic traders want to buy stocks as they believe they will rise in price. It should be noted that a bull market does not necessarily result in every stock price increasing. Instead, it refers to the main market equity indexes rising.
Bullish market sentiment can be a self-fulfilling prophecy due to the market mechanisms that affect prices. A widespread extreme bullish market sentiment will often result in price rises as demand outstrips supply when traders are unwilling to sell assets at the current price.
Being bearish when trading refers to the belief that a stock or market will experience a downward trajectory in terms of price, the opposite of being bullish.
Bearish traders who believe that a stock or a market is due for a price decline will typically either not invest and hold cash or seek to profit from this through shorting.
Shorting, otherwise known as short selling, is the method of trading that involves borrowing stock from a broker, selling the stock at market price, and waiting for the stock to fall in price.
The trader would rebuy the stock on the market, ideally after a decrease in price and return the stock to the broker to cover the short position and close the borrowing contract.
If the buying price is lower than the borrowing and selling price, the trader will pocket a profit in the process.
The term Bullish refers to an optimistic belief that the price will go up, causing an upward movement on a price chart that represents a bull striking upwards with their horns. This is in contrast to Bearish, which is used to describe the expectation that prices will fall, visually similar to a bear that attacks with its paws in a downward direction.
A trader expressing bullish attitudes is often referred to as a ‘Bull’; similarly, a bearish trader will be labelled as a ‘Bear’. To function, a market needs a combination of both bulls and bears.
For example, if every trader were bullish in their belief that prices would go up, there would be nobody selling their stocks. Similarly, if every trader were bearish, there would be no buyers.
When a bearish market that has previously experienced a downward trend begins to move in the opposite direction and experience an upward trend, this is referred to as a bullish reversal.
The financial crisis of 2007 initiated by the subprime mortgage crisis and subsequent overleveraged debt-based derivatives did result in a sharp bear market between 2007 – 2009, which led to the S&P 500 low of 666 in March 2009. For a long period afterwards, the US stock market had primarily been a bull market with various market sentiment indicators all showcasing an upwards trajectory. From the S&P 500 low of March 2009, the index rose to a high of over 3300 in early 2020. During this period, the bull market coincided with a long period of economic expansion within the US. However, it is important to note that it is possible to have a bull market without economic growth and similarly, it is possible to have a bear market without a recession.
Sentiment in bull markets can be categorized into three main timestamps:
An early-stage bull market is challenging to identify. It starts right after the market has made a secular low and can only be identified ex-post, meaning once it has become clear that prices would rise and make new all-time highs again.
The market sentiment during an early-stage Bull market is still highly depressed, with market comments in newspapers and magazines and online having a very negative attitude.
Most people have lost money in the market and started forgetting that the market exists. They try to ignore stock market-related news and forget about their losses, not making any new investments.
Companies have gone bankrupt; risky stocks typically are down 90% or more. Entire industries that have been hailed as being about to change how the world works are suddenly exposed as ‘a bubble’ led by ‘irrational exuberance’.
However, the negativity is the seed for the next bull market.
The market still fluctuates heavily during an early bull market, with high volatility. A sudden price drop often follows an initial rally. But, the market does not make lower lows and changes from a declining trend into a slowly ascending yet still a volatile trend.
The market typically bottoms out in a double-bottom or in a V-shaped bottom.
Indicators, including market sentiment indicators, typically turn during early bull markets are so-called ‘leading indicators’. These economic indicators lead the business cycle and the recovery before a new recovery begins. The most widely used leading indicators are the Purchase Manager Index (new orders and services), and yield curve spreads.
However, it is challenging to spot when an early bull market has started by simply looking at economic indicators: they might be all over the place. For example, some leading indicators would indicate a recovery is underway, while others are still profoundly negative.
The mid-stage of a bull market can last for a very long time, most typically years. During the mid-stage of a bull market, the sentiment shifts from the still depressed mood encountered in an early-stage bull market to a slightly more optimistic outlook.
The economy has recovered, and the recession has ended. Inflation is typically trending down. Leading indicators such as PMIs are in an expansive territory again.
Most economic indicators are positive and do not fluctuate heavily. As a result, central banks have ended the rate-cutting cycle and are either keeping rates flat or eye rate increases but typically not acting with large interest rate moves in either direction.
During mid-stage bull markets, everything is rosy and easy: the market typically keeps going step by step with decreasing volatility. Setbacks occur but are not significant and are quickly bought up, bringing the market to new highs. Riskier, high-beta stocks start outperforming the broader market as the economy keeps improving and growing steadily.
During such times, buy-and-hold strategies perform best. Traders who sit on their hands and hold positions are rewarded, while others who try to take profits early will lose out on the market’s significant gains in such a period.
Most successful investors are characterised by the ability to sit tight during such periods and allow their portfolios to grow.
Late-stage bull markets are feasible to identify by investors with long-term memory and market experience: it is the exuberance which gives them away and signals to seasoned investors that it is time to close the risky positions in their portfolio, take profits and prepare for a difficult time ahead.
During a late-stage bull market, all sorts of highly risky bets are being made and tend to be successful such as betting on ‘meme-stocks’ with poor fundamentals of investments which haven’t been considered mainstream.
As a result, all sorts of ‘bubbles’ emerge, and huge returns occur for people willing to take risks, prepared to lose their entire investment. However, many novice traders are not aware of the latter part.
An excellent example of such a market stage is the dot-com bubble in 1999 and the crypto bubble in 2021.
During late-stage bull markets, many people make high fortunes only to lose them entirely once the market eventually crashes.
Economic indicators are strong and overheating: the labour market is very tight, and inflation is increasing. As a result, central banks typically have already started to raise rates.
History is littered with successful traders who have gained notoriety for correctly implementing bullish or bearish driven trading strategies. Whilst controversial, examples of bearish traders who have profited by short selling during a market crash include:
The Hungarian chair of the Soros Fund Management cemented his reputation as a supreme currency speculator with a well-coordinated bearish trade in 1992. By taking advantage of the European Monetary System and the UK’s Exchange Rate Mechanism, Soros speculatively short sold $10 billion worth of pounds, which culminated in a currency devaluation of the pound by 15%. Soros pocketed $1.1 billion of profit in the process, but the stunt remains controversial.
At his financial peak in 1929, Livermore was worth the equivalent of $1.5 billion in today’s money. The US trader followed his own strategies driven by price patterns and volume analysis. Jesse Livermore shorted the Stock Market Crash of 1929 having been bearish about the market.
Paulson, of the Paulson & Co. hedge fund, made billions in 2007 by successfully short selling the US subprime mortgage lending market, to the detriment of numerous US homeowners. By using credit default swaps, Paulson was able to successfully bet against the subprime market, pocketing over $4 billion dollars from his bearish trading strategy.
Bullish vs bearish? Many people would say that there is no specific answer and that it depends upon your trading strategy and whether your predictions ultimately come to fruition or not.
While this might be true for any individual trade, it is certainly not true if you look at returns over long periods of time.
Looking at trading through an angle of probability, in the long run there is a so-called ‘drift’ in stock prices: this means that stock prices tend to go up over long periods of time. This is why there is almost no bearish trader who can continuously be successful in trading only with bearish bets.
This is largely down to the unsustainability of each. The 2022 CFA Program Curriculum Level 1 Box Set by John Wiley & Sons stated, “In overbought conditions, market sentiment is considered unsustainably bullish. In oversold conditions, market sentiment is considered unsustainably bearish”.
As a result, most traders tend to have a long-term bullish conviction and like to ‘buy the dip’ in a crisis. Bearish traders like to pick-the-top and identify markets where the shift from a bubble to a crash is underway. The movie ‘The Big Short’ showcases prominent bearish traders during the 2008 crash and is based on real people and their stories.
A trader doesn’t need to be just bullish or bearish in their attitudes, either in the short term or long term. Whilst a trader might be bullish that prices will rise over the long term but be bearish in the short term, so seek to follow alternative trading strategies for the immediate time being.
By managing your risk effectively and using StockGeist.ai’s market sentiment monitoring platform as a reliable and efficient analysis tool, traders can stay ahead of the game through real-time investor sentiment analysis to minimize risk and maximize returns regardless of whether they are bullish or bearish.
Alternatively, incorporate our data into your own project with our stock news sentiment API.