Bull and Bear Markets Explained

Bull and bear markets are terms mostly used by traders and investors. They use these terms to explain how a specific market is performing. Like for example the stock market in general, tech stocks, bonds, real estate, crypto and so on.

It could even refer to a specific asset in an industry. Like for example Bitcoin which is one cryptocurrency out of the whole crypto industry.

However sometimes people do not specify the market they are referring to. In this case they are referring to the stock market.

Bull and bear markets are polar opposites to each other.

What Is A Bull Market?

A bull market means that an asset or assets are going up in price over a long period of time. It has to increase by 20% or more since the last downturn. Bull markets encourage investors and traders to buy into the market.

For example here is a chart of the DJIA (Dow Jones Industrial Average). The DJIA is made up of 30 of the top performing (blue chip) stocks from across all industries. So it is the total price value of all the stocks it tracks.

DJIA chart bull market example
Sourced from TradingView

As you can see from 2020 until end of 2021 stocks where in a bull market. This is because overall the individual stock prices that make up the DJIA kept increasing in value.

Bull markets are fuelled by investor confidence in the market because they are optimistic for the future. That is to say the market is strengthening and consumer demand is increasing.

This has a knock on effect on assets prices. For stocks in particular, investors expect that businesses will have improved cash flow and will make more profit.

Companies are able to hire more workers and hence there is a low level of unemployment in the general economy. GDP (gross domestic product) will also increase at this point in time.

What Is A Bear Market?

A bear market means that an asset or assets lost 20% or more of their value. The market ends up going down because many investors and traders are selling their assets.

This is always a direct result of negative investor sentiment. Investors become risk averse and do not want to speculate in the market. As a result they sell their assets to avoid further loses. However this creates a domino effect and it triggers other sellers to do the same. 

For example, let us take a look at the Bitcoin chart. Since the end of 2021 the Bitcoin price has fallen down dramatically.

Bitcoin chart signaling crypto bear market
Sourced from TradingView

It has fallen far more than 20% which is characteristic of a bear market in Bitcoin. However it is in line with its 4 year cycle.

A bear market has the opposite effect of a bull market. It is characterised by lower consumer demand because the market is weakening.

With the stock market companies decrease their output and could make less profit. As a result there is usually a higher level of unemployment and GDP numbers fall. A bear market in stocks could end up being a sign of a recession.

Causes Of A Bear

Usually bear markets do not come out of nowhere. There is usually some underlying problem in the market or an external issue that destabilises the market and triggers it.

Bear market causes include:

  • An overheated market – the market grew too fast and cannot keep up with demand
  • Slowing market conditions – this is in line with normal market cycles.
  • Wars
  • Geopolitical issues
  • Paradigm shifts – like when customers shifted buying products online instead of brick and mortar stores.

Bear Market vs Correction

Both bear markets as well as bull markets do not go up and down in a straight line. They have their ups and downs on a yearly, monthly and daily basis. That is to say even on a second by second basis. 

This is the result of buyers and sellers negotiating on the price of an asset. You get the minor percentage increase or decrease in prices here and there.

However bear markets and corrections are different to the usual small scale fluctuations. A bear market and a correction is a more significant drawdown in price.

The difference between bear markets and corrections is that bear markets are more severe than corrections. A correction is still a significant drawdown, but it is less than 20%. Anything equal to or more than 20% is classed as a bear market.

Bear Market vs Flash Crash

A flash crash is a sudden crash in a market. They are an anomaly and do not happen often. They last no more than a few hours, but they are deep corrections. Hence the name flash crash.

Here is an example of the 2010 flash crash in stock indexes. Below is the DJIA. The flash crash lasted 36 minutes and the DJIA lost 9% of its value.

Flashcrash 2010
Sourced from Wikipedia

Flash crashes are crashes that go below the previous market close. That is to say below the final price of the last day the market traded.

When there is a flash crashes between 7 – 13%, market circuit breakers stop trading activity for 15 minutes. On the other hand a crash of more than 20% will stop trading for the rest of the day.

Flash crashes are not considered bear markets even if they are 20% or more. However a flash crash could show signs of weakness and the start of a bear market.

Secular Bull Market And Secular Bear Market

A secular market is a market that has a great deal of market forces pushing it in one direction. So you can have a secular bull market where market prices are going up. As well as a secular bear market where prices are going down.

Secular markets do not just come out of nowhere. They usually would have built a solid base case. As a result it provides inbuilt momentum to move the market in a particular direction. The market will have these strong market forces for many years and can even last decades.

For example the bond market had a 40-year bull run.

40 year bond bull run
Sourced from Business Insider

However just because a market is secular it does not mean it cannot change direction in between. There could be cyclical forces that disrupt it for a while. This would happen when the price of the asset is affected by:

As a result you could have a cyclical bear in a secular bull market. Or a cyclical bull market in a secular bear market. For example gold has been in a secular bull market since 1999. However it has had a cyclical bear market in between before it started going up again.

Gold cylical bear in secular bull
Sourced from TradingView

How Long Bear Markets Last

There is no fixed amount of time for how long a bear market should last. A market gets called a bear market because of the percentage drawdown.

However it should last a minimum of a few weeks. Moreover as I mentioned previously, flash crashes do not count as bear markets.

Some bear markets last much longer than others. For example, the last six S&P 500 bear markets didn’t all take the same amount of time to bottom:

Start DateTime to BottomDecline
1973630 days48.2%
1980622 days27.1%
1987101 days33.5%
2000929 days49.1%
2007517 days56.8%
202033 days33.9%
Sourced from The Motley Fool

As you can see the bear market in 2020 only lasted a month. On the other hand other bear markets lasted years.

However different types of bear markets have a different time range:

  • Cyclical bear market – a few weeks to several years
  • Secular bear market – 1 decade to several decades

How Long Bull Markets Last

Similarly to bear markets, not all bull markets last the same amount of time. Additionally it depends on what type of bull market.

How long bull markets last:

  • Cyclical bull market – a few weeks to several years
  • Secular bull market – 1 decade to several decades

As you can see with the Business Insider image further up the article, the bond bull market lasted 40 years. That was one of the longest secular bull markets you can get.

On the other hand some other bull markets lasted much less. For example one of the shortest stock bull markets lasted around a year and a half.

This happened after the stock market crash of Black Monday in 1987. The S&P 500 had a bull run from December 1987 that lasted until July 1990.

How to Make Money in a Bull Market

Most investors and traders aim to buy low and sell high. They might not know the exact market bottom and top. However the idea is to buy cheap and sell as close to the top to make the most profit.

Unfortunately a lot of investors and traders get scared off when there is a bear market. So much so that when the market turns around they are not willing to come back into the market. As a result they miss out on good gains.

Here is a great example of how herd mentality works:

Bitcoin prices
Sourced from Being in Crypto

Investors and traders need to think about buying assets like they do when they buy clothes. When clothes are on sale they flock to the stores to get a bargain or two.

So if investors and traders buy cheap they can take advantage of a bull market. There are different methods of buying during a bull market:

  • Buy and hold – This is when investors go in and buy an asset with a lump sum.
  • Dollar cost averaging – This is when investors keep buying more of an asset on a regular basis.
  • Buying the dip – This is when traders buy more of an asset. However they time their entry and buy when there is a slight downturn or correction. So the asset is at a cheaper price. That it to say because they are confident the price will go up again.

Another way you can make money in a bull market is by buying call options.

Call Options

Call options are more risky than buying an asset and owning it outright. This is because call options are like making bets.

Call options give you the right to buy an asset in future at a fixed price. Additionally they have an expiration date.

So for example you want to buy 100 shares of a stock at $100 each share within 3 months. If the price goes up to $120 then you make a profit. That is because you buy them at $100, but sell at $120.

So if you had to pay $10,000 for the shares you made $12,000. However from that amount you have to deduct the fee to pay the broker for the trade.

How To Make Money In A Bear Market

Of course it is much easier to trade and invest when a market is on the rise. However if a market is trending downwards then you have to beware.

There is a very small percentage of people that are successful traders. Hence why you hear mostly of successful investors and not traders.

That is not to say that you cannot trade a bear market. There are ways you can trade a bear market and make money.

For example, Jeff Berwick of The Crypto Vigilante made millions with Luna during its collapse. All this just from buying up several thousand dollars’ worth of Luna.

Terra luna collapse
Chart showing Terra Luna collapse from $120 to $0.02 in just 2 days. Terra Luna continued to go down and never recovered. Sourced from Business2Community.

Additionally Jeff did not use any complex financial instruments to make the trade. All he did was buy Luna. However Jeff has a lot of experience and the resources to pull it off. In fact he was asking many questions to his experienced team members so he could make this trade.

This trade Jeff made did not come without risk. In fact he could have lost his money. However the trade had great risk reward. So it was worthwhile even if he had lost the money.

This goes to show you just have to know what you are doing. Otherwise you could lose a lot of money. In fact most people that trade in bear markets tend to lose money. Hence why you do not hear more of these fantastic stories on a regular basis. They are one offs.

Regardless, how can you make money in a bear market? Here are a few ways to pull it off.

Find A Bull Market

One of the least risky ways of dodging a bear market is to figure out that the market is going to turn south and get out. There are ways to figure this out including fundamental analysis, technical analysis including chart patterns.

Once you are out you need to find a bull market. Just because one or more markets are in a bear market it does not mean all other assets are in one. There is a famous saying that is mentioned every so often:

There is always a bull market somewhere

This is because sometimes some markets react to the fallout of other markets. Like for example how gold tends to perform well in times of severe crisis. At this point in time most stocks are down.

Moreover as the gold price is taking off the gold mining stocks will also do well. To clarify the mining stocks will do multiples better than gold itself.

So when there is a bear market you could look at different investments like:

  • different kinds of stocks in different industries,
  • precious metals,
  • bonds,
  • real estate and
  • cryptocurrencies

Short Selling

You can take advantage of short selling when you have some certainty that a bear market is going to start.

Short selling is when you borrow securities like stocks from a broker. That is to say you do not pay for the stocks. You are simply borrowing them and you will give them back at a later date to the broker.

You go ahead and sell the stock. For example you borrowed 1000 shares worth of company X that are worth $100 each. So if you sell them you will have $100,000.

When the shares go down you can buy them back at a lower price. For example let us say the stock goes down to $60 in the downturn. Therefore you spend $60,000 to buy the same amount of stocks.

You have to return the 1000 shares you borrowed back to the broker. However you can pocket the difference you made in the trade. In this case it would amount to $40,000.

However you would need to also pay the broker a fee for letting you borrow the stock in the first place. So you would end up with a little less than $40k.

Short selling is the most risky strategy out of all the strategies to make money in a bear market. That is to say if the market goes up instead of down. In this case you would need to buy the shares at a higher price and you would lose money.

Put Options

On the other hand put options are still a kind of bet, but they are less risky than short selling. A put option gives you the right to sell your shares at a specific price. However your right to sell will expire at a specific date and time.

So for example you have 1000 shares that are worth $100 each. If the price of the stock goes down to $60 within the contracts given time frame. You can still sell the stock at $100 each even though the price went down. Additionally you can pocket the difference, minus the broker fee to make the trade.

Frequently Asked Questions

What is the definition of a bull market?

A bull market is when an asset increases in value by 20% or more after a downturn. This needs to happen over an extended time period.

What is the definition of a bear market?

A bear market is a correction of 20% or more for an extended time period. There are different types of bear markets that have different durations.

How long does a bull market last?

Different kinds of bull markets have different durations:
·      Cyclical bull markets – a few weeks to several years
·      Secular bull markets – 1 decade to several decades

How long does a bear market last?

Different kinds of bear markets have different durations:
·      Cyclical bear markets – a few weeks to several years
·      Secular bear markets – 1 decade to several decades

How to invest in a bear market?

There are 3 ways of making money in a bear market:
·      Finding other assets that are in a bull market
·      Short selling
·      Put options

Does a bear market mean a recession is coming?

This would depend on which market is being referred to. A bear market in stocks specifically could signal a recession.