The stock market has moods, just like you do. Its mood at any point, however, is an aggregation of the market mood of the individual investors. Ordinarily, the sentiment of investors will vary as much as they vary in goals, needs, perspective and other variables that drive action. This accounts for the random movements and swings: some are exiting specific stocks, while others are happy getting in, leaving no sustained general pattern. In some periods, however, certain factors can coalesce the general sentiments of investors and bring about a sustained direction of share prices. We speak of a bull market for a sustained upward direction and a bear market when a downward drive is sustained.
Incidentally, both animals that symbolise these directions are powerful creatures that could prove deadly (a bear is not the same as teddy bear), so you wonder why one symbolises a push in the market, as it were, while the other marks a pull. Well, I can't prove this, but one account is that it all has to do with the battle posture of these animals: the bull trajects its horns upwards in an attack on the opponent while the bear swipes down its paws. At least, that helps you picture the price directions.
Characteristics
Given the widespread use of these terms, there is no doubt that the average investor knows what price directions they indicate. So, let's focus rather on the fine points. A bull market is on a sustained rise because the investors have cause to expect rising stock prices, which sustains the pressure on price. This happens because more stocks are bought in anticipation of profits from further prices increases, and further purchases feed the frenzy for more purchases, pushing prices even higher. Investor mood is positive, indeed upbeat. Invariably, most stocks stay on bid, with demand outmatching supply. Usually, the fundamental macroeconomic direction - a strong economic growth pattern - and/or other positive factors are sustaining this sentiment. If this clear pattern continues, leading to a significant growth of the market index, that trend is clearly bullish. The reversal of this trend, on a sustained basis, will mark the entry of the bears. Here, the market loses its confidence, and there is a general expectation of price fall, over an extended period and to a significant level. The tendency is to want to sell to beat the price slide, a development that gets widespread, leading to more price falls. Supply will obviously outpace demand, placing stocks on offer. The market index begins to shed weight and such trend can, like the bull period, last for months or years. This will depend on the sustenance of macroeconomic conditions that are at play.
What a Wise Investor Will do
The key
issue is how to ride the market patterns to advantage. That should be your goal as an investor, knowing that while such periods of marked market direction could cause some investors some pain, they portend a huge opportunity for wealth advancement, if you get your reaction, or better still, proaction, right on target. That too is the challenge: how to be on target, because market prediction is hardly an exact science.
When the Market is Rising (a bull market): The dream of every investor will be to buy low (before price shoots up) and to sell high (before a price reversal sets in). If we could all read those trends correctly, no transaction will probably take place since everybody will act in the same direction. The reality is that not everybody will know when the market is off the block heading up (some will still be selling off). That creates opportunity for those who understand, as they would buy up. How do you get to know? There is not magic formula other than your best market analysis and judgement. Track the market variables and economic, political and other factors that impact on market performance. If the market goes up, you will definitely know it has, if you are following the prices. What you won't know, perhaps, is at what point it changes from normal market swing to the beginning of what will be a sustained upward ride. Getting in as early as possible, when the bull comes, is what you should work and pray for.
Selling at the right point before a price reversal is also a challenge. If you are panicky, you sell too early and lose money - potential profit. If you wait too long, the market possibly moves against you and you also lose money. Is there a perfect way? No magic. One way is to sell in tranches, to lock in some profits while playing along for further increases. In every situation, market alertness is what you cannot compromise, if you want to win big.
When the Market is Falling: The trouble, too, is that you, most likely, won't know when the market has headed into what will be a sustained bear run. Prices falling up to a level is a regular feature of the market as some investors sell off to take in their profit, possibly causing a temporary glut. That will usually correct quickly and is no ground to rush to sell your stock. Knowing when it has gone beyond this is what to watch for. When that occurs, you know that money will be lost, except for the investor that moves in to sell early. If you are able to sell off, you should calmly remain largely in cash (money market), while watching the market direction. As you will expect, at some point this turns into a buying opportunity, because, in the long run, the market will correct and begin an upward climb again. That's the way of the market and getting to understand this pattern will help you position and make real money when you get it right. It won't be everyday, but a few opportunities may be all you need. While it won't be easy knowing precisely when the market has bottomed out and will begin to head up again, but you don't want to be too late in moving in. In all, vigilance is the key.
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