How To Invest In A Bullish Or Bearish Stock Market
Movement in the stock market occurs as a result of stock prices going up or down. If the majority of investors are buying stock, then prices go up. If the majority of investors are selling stock, then prices go down.
People buy or sell stocks largely as a result of the expectations they have about how the market will perform. Generally speaking, if people think that the economy is going to do well, then they buy stocks, but if they think that it’s going to do poorly, then they either sell the stocks they own or don’t buy any more.
A rising stock market is referred to as a bull market, although at the start of a bull market the stock market doesn’t look very bullish at all. This is why it can be so difficult for investors to recognize the start of a bull market, but for those skilled enough to do so, they can expect to reap large financial rewards.
How To Recognize The Start Of A Bull Market
Bull markets usually start in the depths of a bear market (a declining market), and although it’s hard to know exactly when the stock market will turn bullish, there are some lessons that we can learn from previous stock market trends as detailed below.
Pessimistic Signs Of Recovery
Bull markets tend to start in the depths of pessimism. Investors who have been affected by the bear market avoid stocks or sell the stocks they own, and analysts talk down the market causing stock prices to fall even further. However, eventually share prices drop to a level where their price outweighs their risk, and so investors begin to buy stocks again which then causes things to rise.
Pessimism From The Media
The mainstream media can be a great indicator of the direction the stock market is going to take, because by the time they find out about an economic trend and report on it, that trend has usually already played itself out and is probably ready to change course.
A good example of this can be found with Amazon.com CEO Jeff Bezos, who was voted Time magazine’s Man of the Year in 2000. Shortly after this however, Amazon’s stock fell over 90 percent from its high in late 1999. So it is not uncommon for the media to report that the stock market is taking one direction, when in fact it is about to take another. So don’t believe everything you hear in the media!
Economic Statistics
Once an economy has hit the bottom, economic statistics slowly start to improve. One such economic indicator you should look out for is the Index of Leading Economic Indicators (LEI).
From this information, you should be able to determine whether or not the economy is starting to recover, before you go ahead and make an investment. This can prove to be a far more accurate way of predicting future bull markets.
Economic Conditions
When economic conditions for people and companies are stable and strong, you can expect the market to turn bullish. Good economic conditions occur when profits are strong and stable for companies, and consumers are seeing strong and increasing income growth.
The more money that is being made, the more money that will be available to spend and invest, thereby causing the stock market to rise.
Indicators Of Change
When the economy suffers, so do individuals and companies. Since in a bad economy people are unlikely to make major financial commitments, they choose to hold back on purchasing expensive items such as new cars, houses and luxury goods.
The industries that produce these items suffer as a result, because sales of expensive items start to fall and reach a low point. However, as the economy improves and people start to buy these expensive items again, these industries experience increasing sales and profit.
Keeping an eye on such industries can therefore be used as a gauge of how well the economy is doing and which direction the stock market is headed.
Peace & War
Generally speaking, war or major natural disasters tend to be bad for the economy and the global financial markets as a whole. However, some industries will benefit and so are likely to see the value of their stocks increase as a result of such events.
In times of war, this is likely to include military or defence related companies. When natural disasters occur, construction or aid companies are likely to benefit.
How To Invest In A Bullish Stock Market
In the stock market, a bull market is a rising market, and during a bull market, the value of just about every stock goes up. Whilst this is certainly good news for investors, a bull market does carry some risks.
One of the major risks is the effect that a bull market can have on how investors make investment decisions. If the stock market is doing well, and the value of stocks are increasing, investors can very easily start to become overconfident.
Some investors for example, start to believe that their success is solely due to their ability as an investor, rather than the fact that they are in a bull market. As a result, investors can very easily fall into the trap of making increasingly risky choices, using less discipline and relying on less diligence and research when buying stocks.
But when the market suddenly changes and catches them off guard, it is not uncommon for such careless investors to suffer big losses. This is example what happened when the dot-com bubble burst.
So the bottom line when it comes to successful stock market investing, is that no matter how well or how poorly the market is doing, you should never forget the fundamentals, because ultimately, they are what determine how well your investments will perform.
Another key to becoming a successful investor, is being able to identify the start of a bull market or the end of a bear market. The more accurately you can do this, the higher your returns will be later on. If you are successful in spotting the start of a bull market, be aware of the following points before you purchase any stocks.
Bargain Hunter
At the very tail end of a bear market, stock prices have pretty much hit rock bottom. This has come as a result of investors selling stocks and stock market analysts talking the market down. For you as a bargain hunter investor, this is a great time to buy because it means that you can pick up stocks at very low prices.
The trick however, is not to just buy any stocks, but to purchase stocks in companies that show positive growth in terms of sales and earnings.
Look for companies which have strong fundamentals. Do they have increasing sales and earnings from the previous year? Or are they in decline? Will a company’s products and services still be in demand next year? Asking yourself questions such as these, should help you to gauge the financial health of a company and determine whether or not they are worth investing in.
Class Of Stock
Some stocks are more aggressive choices than others, and the choices you make largely reflect your risk tolerance. As a stock market investor, you therefore decide whether you want to invest in small cap stocks with rapid growth prospects but with higher risk, or large cap stocks with slower growth prospects but with lower risk.
Choose Appropriate Industries
Although the price of virtually all stocks in a bull market tends to increase, not all do, and some may increase more than others. Try to identify the industries which you think will perform well when the market starts to recover, as these industries will give you the greatest return on your investment.
Diversify Your Investments
Although it can be tempting to put all your money into the stock market when it’s doing well, if things were to change suddenly and you hadn’t diversified your assets, you could find yourself in some very serious financial trouble.
In a bull market, try to diversify your investment portfolio by investing in different types of stocks from different industries. It is also a good idea to diversify by putting your money into non stock investments, such as savings bonds, bank accounts and investing in precious metals such as gold or silver.
Your Financial Investment Goals
Regardless of how well the stock market is doing, it is important that you never lose sight of your investment goals and your reason for investing in the first place.
For example, a 35-year-old is likely to have a very different investment strategy than a 65-year-old. Whereas the 35-year-old may be interested in rapid growth with small cap stocks, the 65-year-old may be happy to play it safe with large cap stocks.
Some investors may even have little money invested in the stock market because they have already reached their investment goals, and so are more interested in preserving their wealth than growing it.
So the bottom line is to always remember your investment goals and don’t lose sight of them, because if you do and something goes wrong, you may never end up achieving any of your goals at all.
How To Identify The Start Of A Bear Market
A falling stock market is called a bear market, and it occurs when stock prices are in decline and investors are no longer buying stock or are selling the stock they own. As a financial investor, being able to recognize the start of a bear market, or the end of a bull market, is absolutely critical to your success.
If you invest your money at the wrong time for example, you are likely to purchase overvalued stock that will most likely decrease in value. However, if you invest at the right time, you are likely to purchase undervalued stock cheaply and see a good rate of return on your investment later on.
Below you will find some of the signs to look out for which indicate an emerging bear market.
Optimism
When the stock market is doing well, investors and analysts can sometimes get a little carried away. Take Irving Fisher for example, who, as a well-known financial expert in 1929, stated that stocks had reached a permanent plateau and that investments would continue to be bullish for the foreseeable future.
A few weeks later however, the stock market crashed and all the investors who listened to Fisher’s advice lost a lot of money. There were even some economists in 1999 saying the same thing that Fisher had said 70 years ago, only this time, it was right before the dot-com bust. So when things are going well, don’t fall into the trap of believing that the good times will never end. A sign of an emerging bear market is very often this false placed optimism in the future.
Usually, you will know when this optimism has reached its peak and that a bear market is just around the corner, when you start getting investment advice from friends, co-workers and celebrities on TV. During a bull market, everyone thinks that they are an expert at investing because their stocks are doing well.
However, it is during this very time that you should be especially cautious about the investments you make, and not just take anyone’s advice without researching the fundamentals first.
Debt
When people think that the economy is doing well, debt levels tend to hit record highs as people choose to buy luxury items, often at the expense of going into debt. In 1999 for example, just before the dot-com bust, debt levels hit highs in almost every category such as in the corporate, consumer and mortgage sectors.
The reason that debt is significant in terms of stock market investing, is because when a person accumulates too much debt, it can only be removed by repaying that debt or by filing for bankruptcy. So if debt cannot be repaid, the economy and stock market start to fall as there is less money available to spend which then affects everyone including consumers and producers.
The key signs to look out for which could indicate an upcoming bear market, is an increase in the number of people filing for bankruptcy and rising national debt.
The Money Supply
When the money supply of a country grows beyond the economy’s needs, you can expect big problems on the horizon.
As more money is pumped into the system, more money is circulated through the banks. This money then flows into investment projects, but due to the abundant money supply, much of it is wasted by people who make poor investment decisions.
The long-term effect of this, is that it imbalances the economic system which will eventually lead to economic downturns that can take many years to fix.
Government Interventions
Every economy that has collapsed in the past, ultimately did so because of excessive government intervention. In free market economies, this usually occurs in the form of taxes, laws and regulations.
As a financial investor, it is therefore in your best interest to keep an eye on what your government is doing, and to determine whether or not their actions will benefit the economy or harm it in the long run.
War & Conflict
Any significant disturbances to the world order can have a negative impact on financial markets. So be on the look out for possible wars that could occur in the future, as these may signal a downturn in the market. World conflict can also negatively impact financial markets, so be aware of trade wars, tariffs and boycotts which could affect the value of your investments.
How To Be Successful In A Bearish Stock Market
Whilst some investors recommend that you adopt a buy and hold strategy when investing in the stock market, there are some instances, such as the start of a bear market, when holding onto your stock can prove to be financial suicide. Part of being a successful investor, therefore comes from knowing when to buy and when to sell your stocks.
If you can buy stock when prices are low and sell when prices hit their peak, you are likely to experience an excellent rate of return on your original investment. Of course, stock market investing isn’t such a simple affair, as otherwise everyone would be making money.
In all likelihood you will never be able to accurately predict when the stock market hits rock bottom or reaches its maximum peak. The best you can hope for is being able to identify the signs of an emerging bear or bull market.
Even though you may not end up making maximum profit on your investments, you will still be well ahead of the crowd if all you can do is recognize when the market is going to drop and when it is going to go up because you will be able to change your investment strategy accordingly.
Below we look at several important points that you should take into consideration if you wish to be successful during an emerging bear market. Should you hold onto your stocks? Should you sell them? What should you do in an uncertain market? Let’s find out!
Your Financial Situation
Regardless of how well or poorly the stock market is doing, it is always a good idea to review your current financial situation before you buy or sell stocks. Things to think about include the security of your financial situation, how much money you have saved in reserve as an emergency fund and your current level of debt or expenses.
If you find that you are in good financial standing, then you can probably afford to buy some stocks. If however, you are in a poor financial standing, then you may be unable to buy or you may be forced to sell the stocks which you currently own.
Keep Cash
During a bear market, the value of your stocks are likely to fall in value. As a result, it is a good idea to ensure that you have access to sufficient amounts of cash to see you through these times. Ideally, this cash should be kept in a safe place such as an interest bearing bank account, bank bond or money market fund.
If you have your money invested in such areas rather than being solely invested in the stock market, you will still be able to earn interest on your money even though the market isn’t performing well. Having money tucked away not only gives you peace of mind, but it will also give you time to think about what other sorts of investments you could make.
For example, while your money is earning interest in a bank account, you could be looking for undervalued stock with strong fundamentals that would make a good future investment.
Trailing Stops
Trailing stops are the active use of stop-loss orders on a given stock. For example, if a stock is at $50 and you have a stop-loss at $46, then if your stock moves to $56 you change your stop-loss from $46 to $51.
During a bear market, it is generally recommended to set your stop-loss nearer the market price. For example, if you bought a stock at $60 per share and it is now worth $120 per share and you kept a trailing stop at 10 percent below the current market price, then during the start of a bear market you could change this trailing stop from 10 percent to 5 percent.
Trailing stops are a favored method used by many investors to protect the gains they make on their investments.
What To Do In Uncertain Times
One of the most well-known facts about the stock market, is that it can be an extremely unpredictable place. Sometimes you have highs and sometimes you have lows, but things aren’t always as simple as just going up or down. Sometimes for example, the end of a bear market doesn’t mean the start of a bull market and vice versa. Sometimes the stock market can move sideways or a little either way.
It is during times like these that investing your money successfully can prove to be a challenging task, because as an investor, you are not entirely sure what is going to happen which then makes adopting the right investment strategy even more difficult.
Listening To Analysts
During an uncertain market you will often hear numerous analysts giving opposing points of view. Some believe that there are signs of recovery, whilst others believe that things haven’t yet hit the bottom. As an investor, listening to such opposing viewpoints can very often cause confusion, because you are left uncertain as to who is right and who is wrong.
During such uncertain times, the best strategy is usually to wait it out and see what happens. Although you may get it wrong, waiting it out keeps your money safe and this is what being a successful long-term investor is all about. Minimize your losses and maximize your profit. Base your decisions on the research you have done, and don’t take unnecessary risks with your money.
So if you are uncertain as to which direction the market will take, and none of the financial experts seem to agree either, wait it out and treat the market as if it were a bear market until it becomes decidedly bullish.
Investing In Uncertain Times
In principle, investing in an uncertain stock market is simple. If you are sure that a bear market is starting, then you want to have 100 percent of your growth portfolio invested in stocks. On the other hand, if a bear market is starting you want the percentage to be 0. Therefore, in an uncertain stock market, you should be looking at having 50 percent in stocks and 50 percent in other investments.
However, it is also important to remember that the investment decisions you make will also be affected by your age, current financial condition, family and career plans. So don’t use the estimates that you have just been given as firm percentages, but rather as general guidelines that can be tailored to your investment goals.
