Bull Market: Meaning, Causes and Types

You may have come across this phrase from people who invest in stocks. However, it is important to understand what a bull market is before you start investing. 

In this chapter, we will take you through the concept of the bull market and how it can impact your investment decision. 

What Is a Bull Market?

The word ‘bull’ represents strength. Similarly, in a bull market, the shares become stronger in value. Let’s try to understand bull markets in detail. 

A bull market is a stock market situation where the prices of different stocks increase by at least 20%. This growth is reflected across stock markets, resulting in a bullish trend. In a bull market, the investors see a continuous rise in the prices of stocks. 

A bull market brings about a positive sentiment in investors, who invest their money in the stocks of the sector that is experiencing a rise. As a result, the market cash flow increases, helping the companies generate greater profits. This increase in profits translates to higher shareholder earnings. 

How Do We Identify a Bull Market?

Before you invest your money in the stock market, you need to recognise a bull market. Recognising a bullish trend can be difficult as stock prices fluctuate every minute. However, if the stock prices go up by at least 20% and the trend continues for at least 2 months, you can consider the market bullish. 

Additionally, you can keep a tab on the following parameters to spot a bull market:

• Market Rally: If there is a sustained movement in the stock prices, it is termed a market rally. A sustained movement could be both an increase or decrease in prices but lasts relatively longer.  A bull market rally could result from different factors like tax cuts or lower interest rates charged by the bank. Any expansionary policies that are implemented by the Government increase the cash flow in the economy, leading to a rise in stock prices. 

• Volatility Index: The volatility index is one of the primary indicators of a bull market. A rise in fluctuations or volatility is a trend that comes into the picture when the market is bullish. In India, the NIFTY index option prices are the market's volatility indicators. The NIFTY option prices showcase the level of sensitivity of all the stocks that are a part of the National Stock Exchange. 

• Lower Bond Yields: Whenever there is a bullish trend, the interest rates of zero-risk securities go down significantly. This acts as an incentive for investors to invest their money in the stock market at a higher risk for better returns. 

What Causes a Bull Market?

Now that you know what a bull market is, it is important to understand what causes a bull market. Let’s have a look at the factors that lead to a bullish trend in the stock market. 

• Strong Economy: Countries with strong economies experience a bullish trend in their respective stock markets. If a country makes strong policies and supports a healthy production of goods and services, it is most likely to experience a bull market. When there is harmony in the economy and the market conditions facilitate a healthy sale of goods and services, the stock market tends to become bullish. 

• Large-Cap Companies: A large-cap company is essentially a big corporation with a market capitalisation of more than Rs. 20,000. As the corpus of these companies is quite high, they play a pivotal role in affecting major benchmark indices.If there are small and unsystematic fluctuations in the stock market, the small and mid-cap companies are impacted. However, the performance of these companies does not always give a conclusive trend. An increase in the benchmark index points indicates a bull market, which is heavily dependent on large-cap companies. 

• Fluctuations in the Business Cycle: The fluctuations in the business cycle impact the stock market in different ways. Whenever there is a positive movement in the cycle, it brings about a boom. 

A boom is a situation where the GDP rates of a country go up, owing to an increase in the growth rate and production capacity of the economy. It is followed by a bull market. 

When the business cycle is experiencing a boom, the unemployment rates go down significantly. This translates to more people with money to invest in the stock market. This rise in speculative demand results in a bull market. 

Bull Market History (Examples)

There have been multiple instances in history where the market has shown bullish trends. Let’s take a quick look at some of these examples to understand how these events have been significant in the history of stock markets.

• The Japanese Bull Market of the 1980s: Due to rapid and strong economic growth and an increase in asset prices, the Japanese bull market emerged. But in the 1990s, the asset price bubble burst.

• The Roaring Twenties: The economy saw a massive demand for products and services in the 1920s, which raised speculative pricing. This was when consumer spending was on the rise and economies were booming, eventually leading to a bull market. However, in 1929, the growth could not be sustained, and the market collapsed.

• The Doct Com Bubble: One of the most well-known bullish markets in history is the dot-com bubble. It was driven by the explosive rise of the internet and technology. The S&P 500 index rose by more than 200% over this time.

• The 2009 Bull Market: The longest bull market in history, the 2009 Bull Market started in March 2009 and lasted until February 2020. Over 300% of gains were made by the S&P index in the 2009 Bull Market.  Low-interest rates, robust profitability, and upbeat investor mood propelled the bull market. 

What Should Investors Do in a Bull Market?

While investing in the stock market during the bull market may seem like the obvious thing to do, there are certain things that you need to keep in mind before you invest in the bull market:

• Buy and Hold: When the market is bullish, a buy and hold strategy works the best. If the investors withhold their investments, they are most likely to earn dividends on the same. Also, it is only wise to hold the stocks till there is a substantial increase in the stock prices.However, the buy-and-hold strategy might only work for investors who have been investing in the market for a long and are quite well-versed. 

• Retracement Additions: Retracement is a phase in the stock market where the general price trend of a stock reverses. In a bull market where the prices of the stocks are soaring, there may be a few occasions when the prices take small dips. Investors look out for these dips within the bull market to ensure that they buy at a low price while reaping the benefits of a bull market. This strategy is often termed as buying the dip. The underlying assumption behind this strategy is that the prices of the stocks will move back up.

• Full Swing Trading: Full swing trading is one of the best ways to leverage a bull market situation. Investors become proactive during a bull run, where they short-sell and implement every possible technique to maximise their returns. 

Bull Market vs Bear Market

A bull market is a situation in the stock market where stock prices tend to rise due to a culmination of several economic factors. However, the stock prices tend to decline in a bear market. Let’s have a look at how these markets differ from each other. 

• Market Direction: In a bull market, the prices and the stock market are moving upwards. However, a bear market represents a decline in stock prices.

 

• Duration: A bull run can last for a few months or continue for years, depending on the market situation. The longest bull market went on from 2009 to 2020. The average duration of a bullish trend is 6.6 years.Similarly, a bear market also can last for a couple of months to years. The longest stretch of a bear market was experienced for 61 months during the Great Depression. In this case, the average duration is 1.3 years. 

To invest in stock markets, you need to understand the concept of bull and bear markets. No set technique will give you better returns. Hence, you need to study both these markets well and curate your investment strategy.