What Is a Bull Market?
Table of Contents
- Bull markets are characterized by positive sentiment and consistent price appreciation.
- Bull markets are one of the two primary components of a market cycle.
- Market cycles can be used to help investors time their investment decisions.
Bull markets are one of the two primary market trends, with bear markets being the other. Bull markets refer to a general positive trend within a market. A bull market experiences sustained increase in asset prices, investor optimism, and positive news related to the market. Markets are always in either a bull market or bear market, and the two collectively create one full market cycle.
The most recent complete market cycle in U.S. equities began with a bull market in 2009 following the financial crisis. This bull market ended in March of 2020 due to a COVID-19 bear market. The bear market ended shortly after, putting the market back into a bull market.
Markets are generally expected to rise in value indefinitely, so there are many ways to characterize a bull market. One commonly cited reference is that a bull market begins after a 20% rise from previous local lows, and ends once asset prices pullback by 20% from previous highs. However, market cycles vary significantly across asset classes, making it difficult to apply a single rule to all markets.
The average bull market in U.S. equities lasts 8.5 years, and is normally characterized by stable and consistent growth. Bull and bear markets among equities are almost always associated with the broader economy’s expansions and recessions, respectively. Bitcoin bull markets often last for a year or less, and can see significant price appreciation in a very short amount of time.
Investment Strategies Based On Market Cycles
Timing investments based on market cycles is one of many strategies that investors may use in an attempt to gain an edge over the broader market. An investor who has exposure to a market during the bull market, but not the bear market, will make larger profits than an investor who holds for the entire market cycle.
Equities are extremely correlated with the larger economy, so predicting a bear market is often synonymous with predicting an economic recession. Investors can use a broad range of signals to do this, including inflation, employment rates, company earnings, and interest rates.
Bitcoin market cycles are not closely tied to any individual economy. Investors may look at Bitcoin specific news to predict market cycles. This includes adoption by large companies and positions taken by influential individual investors.
Another theory indicates that Bitcoin market cycles are determined by halvings which occur every four years. This idea suggests that the decreased supply resulting from a halving results in price increases as demand outpaces supply. Eventually, markets adjust to the new rate of block subsidy, and prices retract until the next halving. This theory is related to the stock-to-flow (S2F) model.
Predicting bull and bear markets is incredibly difficult. Additionally, bear markets are often much shorter than bull markets, so an investor needs very precise timing to successfully use this investment strategy. This makes trading strategies based on market timing significantly riskier than taking long-term positions.
If a market is generally going up, an investor can be confident that they will make a positive return simply by taking a position and holding it. When investors attempt to time markets they can actually make their returns far worse if their predictions are wrong.
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