Your Money: Ways to recognise, leverage bull and bear markets

By Hemanth Gorur

Bull and bear markets are like two sides of a coin – if you are faced with one, the other one is not too far behind. Although bull and bear markets are generally characterised by continuously rising or dropping prices, that is not all there is to them. Here are some ways to detect them, and use the insights to invest better.

The 20% criterion

Like all markets, the equity markets work on the concept of demand and supply. Here, the assets being bought and sold are stocks. Stock prices rise when demand overpowers supply, and fall when there is excess of supply over demand. Bull markets are characterised by consistent uptrend in stock prices. When the market has risen more than 20% from its last bottom (low), it is said to have entered a bull market phase. Conversely, if the market has declined more than 20% from its previous peak (high), it is said to have entered a bear market phase. We are talking of the entire market here. Intra-day or short-term volatility should not be mistaken for the start of bull market trends.

Highs and lows

Bullish trends are often characterised by the market reaching new highs in succession. When it drops after reaching a newer high, the low it reaches also is higher than the previous low. During bearish trends, the market displays a tendency to make lower highs and lower lows. Again, the time period considered for analysis is crucial here. If sufficiently expanded, a much larger timeline would show very different highs and lows for determination of bullish or bearish trends, than if a much shorter timeline were considered.

Simple moving averages

Another clear sign of whether we are in a bull market or bear market is to see what the moving averages are doing. A simple moving average (SMA) is the average of the closing price levels on a preset number of days. It is calculated as a series of values by successively dropping the oldest price level and including the latest price level in the average. The relevant SMAs for our analysis would be the 50-day, 100-day, and 200-day SMAs. These represent levels of support in bullish markets.

Whenever a shorter duration SMA moves above a longer duration one, it signals an uptrend in prices. When prices are above the 50-day SMA, which in turn is above the 100-day SMA, which in turn is above the 200-day SMA, and the 200-day SMA is sloping upwards, a bullish market is confirmed. Likewise, a bearish market is confirmed when each shorter duration SMA is below the next longer duration SMA, and the longest duration SMA is sloping downwards.

Once bullish and bearish phases are identified, investors can start buying during the initial phases of a bull run and sell when the trend starts reversing. They can accumulate good stocks during bear phases. There could be other strategies as well, but irrespective of strategy, investors need to do their own research before investing.

(The writer is founder, Hermoneytalks.com)