Bull Market Basics

Bull market (also called Bullish Market, Up Market, Bullishness, Booming Market, Bulls and Advancing Market) is a prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as a result of an economic recovery, an economic boom, or investor psychology. Bull markets are primarily described when discussing stocks, but it can be related to bonds, commodities, futures, or forex markets.  Bull markets occur when the demand for a security or group of securities outweighs the normal laws of supply and demand.  This sort of demand pushes prices higher. 

The term "bull" is used to describe the market, because bulls attack by pushing their horns out and up.  Hence the thrusting motion up resembles the upward move of the markets.  Also, when bulls run together, they do so without looking back and go full steam ahead.  This is also the mentality of the markets as traders and speculators trip over themselves attempting to jump on the band wagon for quick gains.

Classical Definition

How do investors know they are in a bull market? The theory follows that if there is a twenty percent or more gain of a major asset class or index over a time period greater than one year, it is likely a bull market. The period of time is an important indicator. If that twenty percent increase comes quickly, in less than a year, it hasn’t established its staying power and could be nothing more than a short-lived rally before returning to a bear market.
Why twenty percent? It was a number established decades ago by those who were developing the theories used in the market today, and twenty percent was nice round, easy-to-work with number that showed realistic gains.

Different Types of Bull Markets

There are two distinct types of bull markets: the cyclical bull market and the secular bull market. A cyclical bull market is a short-term trend that lasts only one or two years. The secular bull market is the long-term trend that lasts from five years up to a full decade or longer. The longer a trend is in force, the more powerful that trend is. Secular bull markets are more desirable than cyclical bull markets.

Characteristics of Bull Market

A bull market is accompanied with a number of identifiers.  Below are some examples:
  • High P/E ratios
  • Endless news and media coverage of the market
  • Marginal retracements after each successive high
Historic Examples

The longest and most famous bull market is the one that began in the early 1990s in which the U.S. equity markets grew at their fastest pace ever. Despite occasional dips in the market, including those in 1987 (Black Monday) and the NASDAQ crash in 2000 following the rise and fall of the dot com boom, the American stock market has been described as being in a continual bull market since about 1983.

 Another bull market occurred in the oil markets, where a barrel of oil ran from $60 to over $150 in roughly 18 months.

General Warning

Bull markets are great periods of time.  During this time, everyone is optimistic about the market.  Be careful not to get caught up in all of the hype though.  Stick with a long-term approach rather than trying to catch all of the hot trends.

Sources and Additional Reading:

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