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Bull Market: Definition, Indicators And Examples

Hanna Kielar8-minute read
August 25, 2021

If you’re new to the world of investing, you’ll need to understand bull markets and how they work. Defined by a continuous trend toward higher prices over time, bull markets offer investors plenty of opportunities to make considerable profits.

But how exactly can a bull market impact your personal finances? Though it’s never a good idea to time the market for periods of increased value, the upward or downward trend of stocks can help you determine how you make your dollar yield the largest possible returns.

What Is A Bull Market?

A bull market, or bull run, is a type of market trend characterized by sustained rising prices – both prices going up today and prices expected to rise in the future. Most people use the term “bull market” to describe the movement of stocks, but bull runs can refer to any type of traded asset that experiences an extended period of price escalations. That includes bonds, gold and real estate.

Bull markets are often associated with high investor confidence and positive public sentiments surrounding the markets. Investors continue to invest with the expectation that the value of their purchase will continue to rise in the immediate future. This positive demand for bullish stocks only further increases its value, creating a feedback loop that escalates the effects of bull markets.

At a certain point, bull markets will reach what’s known as a speculative bubble, which is a spike in the value of a traded asset. Speculative bubbles are symptomatic of a market that is running more on positive sentiments and speculation than the actual value of assets. Fueled by the optimism of a bull market, investors continue to purchase under the belief that prices will steadily rise. Eventually, however, the market bubble will “pop,” prices will drop and the bull market will come to an end.

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Bull Vs. Bear Markets

No discussion of bull markets is complete without breaking down bear markets, and that’s because the two trends serve as opposites of each other. A bear market is, accordingly, when the market faces a downward trend of at least 20% after a relative high. The start of a bear market indicates the end of a bull market, and vice versa.

Where bull markets provide plenty of new, bold opportunities to grow your wealth with the market, bear market investors are typically more cautious in their approach. Bear markets are also associated with economic downturns, higher unemployment and a reduction in discretionary consumer spending.

Should you ever forget the difference between the two, remember the different approaches that both animals employ to attack their enemies. Bears swing their claws in a downward motion, while bulls strike upward with their horns. The movement of these attacks reflects the upward or downward movement of each animal’s respective market.

Bull Market Indicators

Because there isn’t a single metric that certifies the start and end of a bull run period, many experts only label a rising market as bullish in retrospect or after it’s started. That being said, bull markets tend to follow certain characteristics that indicate to investors the emergence of a stock market bull run.

One common rule of thumb follows the current trend in market indexes. If the market index value increases by 20% or more for a minimum of 2 months, you’re likely experiencing a new bull market. With anything less than a 20% boost or a 2-month duration, these price spikes are more likely to be attributed to the day-to-day fluctuations of traded assets.

Another key indicator is the health of the economy. Economic growth isn’t required for a market to be considered a bull run, but positive economic growth and bull markets often go hand-in-hand. That means bull markets usually see a strong gross domestic product, declines in unemployment rates and significant investments from companies on their technologies, processes and people.

The most telling sign of a stock bull market, specifically, is the behavior of stock investors and each of the major market indexes. In a bull market, your fellow investors will see opportunities for substantial gains and buy more stock, banking on the fact that the sustained price increases will net them positive returns. In a similar respect, the price jumps of bull markets are reflected across the major markets, such as the Dow Jones Industrial Average, Nasdaq Composite and S&P 500.

Investing In Bull Stock Markets

Whether you’re new to investing or a full-fledged expert, bull markets provide plenty of opportunities to up your investing game. Encouraged by their optimism for continued growth, many bull market investors are more aggressive during bull markets and therefore take on more risk in their portfolios. Before you jump headfirst into a risky purchase, though, you should consider your own financial standings – including your personal risk tolerance. The longer you plan to hold your money in the market, the more time you have to recover from high-risk investments in the event that you incur losses. Also consider speaking with a financial advisor to determine the best moves for your money.

With that in mind, here are some of the most time-tested approaches that investors use to ride the rising tide of stock prices.

1.   Buy And Hold Stocks

During a bull market, investors expect that any stocks they purchase today will be valued higher as the market trends upward. Using the “buy and hold” strategy, investors make new purchases on stocks and wait to sell them until they see prices that are higher than their point of purchase.

Buying and holding usually works best as a long-term strategy, so it may not be the best option for you if you’re looking to pull your money from financial markets soon.

2.   Invest In ETFs And Mutual Funds

Both ETFs and mutual funds combine investor funds across a collection of different stocks, meaning they help you to diversify your portfolio without having to manage each purchase individually – though there are a few key differences. Mutual funds are typically actively managed by a professional, which accounts for their higher operations costs. ETFs, conversely, are mostly passively managed, resulting in a much lower expense ratio.

Mutual funds and ETFs are popular options during bull runs because they will help you weather the storm of any oncoming bear markets. Diversifying your portfolio across a wide range of industries and companies makes ETFs and mutual funds a great way to hedge your bets.

3.   Look Into Call Options

A call option is the right to purchase shares of stock at a fixed amount, which is otherwise known as the strike price. That means you’re essentially banking on the stock’s price increasing without fully paying for the cost of that stock. If the stock goes up as you expect, the call option provides the right to purchase the stock at or under its purchase price.

Call options are a popular bull strategy because their value appreciates quickly as the market value increases. In that respect, investors must adopt a bullish mindset – where they believe the underlying value will go up and invest on that instinct – in order to profit from call options.

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4.   Prioritize Cyclical Stocks

Cyclical stocks are characterized by their tendency to follow the same highs and lows of the economy, making them another viable option for your own bull market strategy. As the economy expands, cyclical stocks increase in value. Economic depressions cause the price to wane. Cyclical stocks are most common in companies like airlines, restaurants, clothing chains or any other industry that hinges on nonessential consumer spending.

Because bull markets often run parallel to economic expansions, cyclical stocks are likely benefitting from the health of the economy as well. Investors can capitalize on discretionary spending by dedicating some of their portfolio to cyclical industries.

Keep in mind that the fluctuations of cyclical stocks make them a better stock to buy if you are a more experienced investor.

5.   Use Dollar-Cost Averaging

Though you might be tempted to go all-in with investing as prices continue to rise, remember that investing in a bull market still comes with its fair share of risk. Dollar-cost averaging helps beginner investors learn how to invest in stocks in a way that curbs the potential losses that come with the end of a bull run and the market’s subsequent decline.

Used to remove the emotions from investing in stocks, dollar-cost averaging is the practice of purchasing a set amount of assets at consistent intervals over a designated period of time. Instead of expending all of your resources on a single day, dividing that amount over time prevents “timing the market,” or trying to buy a stock at the “perfect” moment. Dollar-cost averaging also removes the volatility that can occur with a lump-sum investment strategy.

Bull Market Examples

There are several examples of noteworthy bull markets in the history of the stock market. The most recent bull market, for example, lasted roughly 11 years and ended at the start of the Coronavirus pandemic. By some accounts, this was the longest-lasting bull market in history, though others give that title to the bull market that began in the 1980s and ended with the dotcom burst.

According to First Trust’s research on the history of bull and bear markets, bull markets historically last an average of 4.4 years compared to an average bear market average of 11.3 months. As the report suggests, understanding historical market performance can help you understand the importance of investing with a long-term perspective.

The Bottom Line: Brace For All Types Of Markets

Making the most of a bull market is a twofold strategy. First, you’ll need to decide what changes you should make in the midst of rising prices. Second, you should begin to anticipate the oncoming bear market and prepare your portfolio accordingly. Investors who understand that no market trend lasts forever are best-equipped to ride the highs and lows of trading assets.

Interested in learning more about growing your wealth? Look through our personal finances resources to get the scoop on all things investing.

Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto℠, RocketHQ℠, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.