Explore strategies in bullish and bearish market to maximise profits and minimise lost in your trades.

Table of Contents

What is a bear market?
What is a bull market?
How To Invest in Bull & Bear Markets
Bear market strategies
Short positions
Short ETFs
Put options
Bull market strategies
Strategies for the Bull Market
Long positions
Long ETFs
Call options
How to recognize bull and bear markets
Summary

Expense ratios, asset divisions, income per share; believe it or not, the investment industry is filled with choices and complexities. Nonetheless, there are two investment terms that are more common; bear and bull markets. Even though these phrases are used to explain how markets are doing, they are entirely different variables in terms of their effect on your security and the investment choices you make.

What is a bear market?

Typically, a bear market is termed as a 20% decrease from current highs. The most popular utilization of this phrase is to describe the S&P 500's operation, which is usually seen as a benchmark gauge for the whole stock market.

Nevertheless, a bear market can be utilized to describe any stock index or a single stock that has dropped by 20% or more from current highs. For instance, the Nasdaq Composite dropped to become a bear market during the dot-com bubble burst from 1999 to 2000. Another example is if a firm has poor earnings and its stock plummets by 30%.

The phrases stock market correction and bear market are frequently utilized as synonyms, though they refer to different scales of poor performance. A stock market correction takes place when the stock plummets by 10% or more from current highs, and it can be promoted to a bear market the moment it reaches the 20% threshold.

What is a bull market?

The consumer's confidence considerably affects the market stocks, commodities, and bonds. What's more, in bull markets which happen once investment prices increase for continuous periods, consumers get confident. Investors are keen to purchase and own stocks due to the successful economies and high employment rates that typically go hand in hand with bull markets, therefore developing a buyer's market.

For a long time, the bull market in the US has been thriving, for example, with the boom after the Second World War that surpassed the market's pinnacle prior to The Great Depression. The US market has had various bull markets from then on, with the longest one being from 2009 till 2019.

Nevertheless, as history indicates, bull markets don't last forever.

How To Invest in Bull & Bear Markets

Both bull and bear markets represent incredible prospects to make money, and the chances of success lie in the strategies used to make a profit under various conditions. This calls for discipline, consistency, focus, and the ability to exploit greed and fear. This piece will help you better understand the strategies you should use to profit in either market.

Growth stocks usually perform decently in bull markets, while value stocks tend to be better in bear markets. Generally, value stocks are not as common in bull markets due to the insight that when the economy is getting better, "undervalued" stocks are affordable for a reason.

Investing in bull and bear markets relies mainly on the time horizon. For instance, if you don't require cash for a long time, it doesn't matter whether the market is bear or bullish. Besides, buy-and-hold investors should avoid changing the investment strategies due to prevailing market conditions.

Furthermore, the stock market can be bear and bull at the same time or vice versa, in various asset classes. If the market is bullish, where price inflation is a major concern, then distributing some of the portfolios to real estate or gold might be a good idea. On the other hand, consider adding apportions to bonds or cashing in some of it if it's a bear stock market. Additionally, branching out the holdings geographically to exploit bull markets happening in different world parts might be a brilliant idea.

Despite the existing stock market state, it is essential to be attentive to the long-term projections of the firm you've invested in. Companies with excellent business rudiments are most likely to have higher returns eventually.

Bear market strategies

As defined above, a bear market is defined as a plummet of 20 % or more in the stock market. Typically, bear markets take place during declines, where cynicism prevails. However, in this situation lies the opportunity to make money with the right strategies.

Short positions

Also known as short selling, taking a short position happens when one borrows and sells shares in hopes the stock will drop in the future. If it works as anticipated and the price of the shares drops, the investor can purchase these shares at a reduced cost to cover the short selling and profit from the difference.

For instance, if the investor shorts stock at $30 per share, and it plummets to $20 in the future, he can purchase the shares back at $20 to cover the short position. Thus, the profit will stand at $10 per share.

Short ETFs

ETF stands for Exchange Traded Fund, which is as well-referred to as Inverse ETF, and it generates returns inverse of a specific index. For instance, an ETF that works inversely to the Nasdaq-100 will fall at approximately 25% once the index increases to 25%. However, if the index plummets to 25%, the ETF will, in turn, rise.

This inverse association makes inverse or short ETFs suitable for investors looking to profit from a decline in the markets or those who want to dodge long positions against such an economy.

Put options

This is the right to retail stock at a specific strike price till a particular date in the future, known as the expiration date. The funds used to pay for this option are known as a premium. A put option surges in value as the original stock plummets. Also, if the stock falls below the put's original price, you can sell the stock at a better price or retail the put at a profit.

Bull market strategies

A bull market takes place when the price of securities increases faster than usual. These markets are followed by epochs of economic growth and confidence among stock buyers.

Strategies for the Bull Market

Long positions

This is just the buying of stock or different security in hopes that its price will surge. The main aim is to purchase the stock at a reduced price and retail it for more money. The difference is the profit. For instance, if you buy the stock at $10 each and later sell it at $15 each, you will make $5 per share.

Long ETFs

When it comes to the bull market, long ETFs are the way to go compared to the bear market, whose ideal option is short ETFs. Most ETFs trail a precise market average like the S&P 500s and trades like stocks.

Usually, the operating and transaction costs are low, and they need zero investment minimum. ETFs look to imitate the motion of the indexes they trail, minus expenses. For instance, in case the S&P 500 increases by 10%, an index-based ETF will increase by almost the same amount.

Call options

This is the right to purchase stock at a specific price until the expiration date. Typically, calls increase in value as the underlying price of the stock increases. Therefore, if the price of the stock increases and surpasses the option strike price, the option purchaser can purchase the stock at a reduced strike price and then retail it for an increased price, thus making a profit.

Moreover, the option buyer can also retail the call option for a profit in the open market, provided the stock is more than the strike price.

How to recognize bull and bear markets

Generally, markets trade in phases meaning that most investors will go through both bear and bull markets. The secret to making a profit from both markets is recognizing when the markets begin topping out or when they're depressing.

The first way to achieve this is by looking at the advance/depression line, which signifies the quantity of progressing issues divided by the depressing problems over a specific time. A number more than one is seen as bullish, whereas a figure less than one is seen as bearish. An increasing line indicates that the markets are progressing. On the other hand, a reducing line in a given period when markets are progressing could symbolize a correction.

Again, when the line has been deteriorating for a few months while the averages are increasing, this could be seen as a negative correction which could most likely result in a bear market or major correction.

A progressing/deteriorating line that constantly moves down indicates that the averages will be weak. All the same, if the line advances for a few months and the averages have declined, this positive variance could translate to the beginning of a bull market. The progress/decline line is among the numerous indicators that will come in handy in determining where and how to invest.

Summary

Even though the stock market has gone through constant phases of growth and deterioration, together with market corrections and blips, it has in the past performed decently. However, past performances do not guarantee good results in the future. Comprehending where the market is headed is having a cautiously established long-term strategy. A branched-out portfolio will come in handy in managing market ups and downs and attaining continuous success.