BULL VS BEAR — UNDERSTANDING THE MARKETS

You don’t have to spend very long around markets to hear the terms bull and bear market and you might find yourself wondering, “What’s a bull market?” You may also hear about rallies and corrections. This post explores the different types of markets you are going to encounter when you trade forex and other markets.

Bull markets vs bear markets

Basically, bull markets go up and bear markets go down. When traders believe prices will rise, they are bullish and when they believe they will fall, they are bearish.

A proper bull market may last for anywhere from a few months to over ten years, but sometimes people will refer to a market as bullish or bearish over a shorter time frame.

Where exactly the terms bull and bear come from is not quite clear, but it’s generally believed to refer to the way bulls and bears attack opponents. Bulls try to get their horns underneath their opponent and thrust upwards, while bears swipe downwards with their claws.

The terms are associated most with stocks and bonds but really apply to all markets.

Rallies and corrections

Rallies and corrections occur over shorter periods and can occur within any broader market trend. During a rally, prices rise and during a correction, prices decline. Both can last for anywhere from a few minutes to several months.

Corrections offer traders an opportunity to buy during a bullish market environment, while rallies offer traders an opportunity to open shorts in a bearish market environment. However, in both cases, traders can trade in the direction of those rallies and corrections on a lower time frame.

Characteristics of bull markets

For stocks, bull markets are associated with rising prices, usually accompanied by rising corporate profits and economic growth. Stock markets tend to rise over the long term, while other markets are more cyclical.

During a general global bull market, most asset classes appreciate apart from forex markets, where some appreciate while others may not. Bull markets are associated with increased risk appetite, which means riskier assets rise more than others. Riskier assets include smaller companies, growth companies, and emerging market currencies, bonds and stocks. On the other hand, safe-haven assets including gold, the US dollar, Swiss Franc, Japanese Yen and US Treasury bonds tend to underperform during these periods.

In general, forex traders need to understand that during broad-based bull markets, riskier currencies are more likely to outperform. That doesn’t mean an individual currency can’t be in a bull market when similar currencies are not. Any country’s currency can appreciate at any time if the right fundamentals are in place. Strong exports, GDP growth, investment flows and certain central bank actions can cause a currency to appreciate relative to other currencies

Characteristics of bear markets

During bear markets, prices decline, but often not in the same way that they rise. Some bear markets occur very quickly with years of gains wiped out in a few months. Sometimes prices don’t fall very far but remain depressed for a long time.

During a bear market, volatility increases, and prices fall much faster than they rise during a bull market. However, some of the strongest rallies, known as bear market rallies, can occur while the market is in a general decline. Bear markets are driven by fear, with long-term investors selling to avoid further losses to their portfolio. Bear market trading strategies are quite different from bull market trading strategies and focus on the fact that prices are driven by fear.

During bear markets, riskier assets fall the most. These include the currencies, bonds and stocks of emerging markets, as well as riskier stocks like small caps, growth stocks, and consumer stocks. Conversely, safe haven assets outperform as investors look for safer places for their money. The USD, CHF, JPY, and gold will often perform well at these times. Defensive stocks, including consumer staples, utilities, and healthcare stocks also perform better than the broader market.

While currencies don’t often appreciate very much for extended periods, they can lose a lot of value very quickly. During country-specific or regional economic crises, currencies can lose a huge amount. This happens when a vicious cycle of inflation, rising interest rates, and growing government debt causes investors to flee a currency.

The Zimbabwean Dollar lost more than 99.9% of its value between 1998 and 2009 as the economy collapsed and hyperinflation took hold. More recently the Venezuelan Bolivar, Argentinian Peso, and Turkish Lira have all come under pressure due to major economic problems in their respective countries.

Conclusion

All markets go through bull and bear markets, though they usually last longer in equity markets. If currencies do gain value it is usually very gradual, while losses can occur very quickly.

Forex traders should be aware of the general market environment and the types of currencies that perform best in those environments. But you should also keep in mind that any currency can buck the general market trend due to country-specific factors.

All content is provided for your information only.

This article may contain opinions and is not advice or a recommendation to buy, sell or hold any investment. No representation or warranty is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however we have put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

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