Bull and bear markets can reflect the optimism and pessimism of the economy but markets can also run counter to the economic data and sentiment.
They can rise – be bullish – when pessimism dictates they should fall and fall – be bearish – when optimism says they should rise.
As an investor you’ll be sensitive to signs of both bull and bear markets to have a better idea of your investment strategy and to structure your portfolio.
Knowing when to time the market is an impossible science.
However, it is essential to understand both market and economic cycles and how market sentiment can affect your securities. It will better inform what to do to either maximise profit or mitigate losses.
Defining the bull and the bear
There are a number of theories about the origin of bear and bull in relation to stock markets among the most common are references to the way both animals attack and the use of bear- and bull-baiting in arenas during Elizabethan times as entertainment.
DeFreitas and Minsky considers a visual reason for the terminology through the actions of the bull and bear as they attack. A bull drives its horn up into the air reflective of the upward movement from low of the stock market while the bear makes a downward swipe with its paw reflecting a down market from high.
According to Merriam Webster, in terms of etymology, the use of bear in a commercial context appeared first.
In the seventeenth century it appeared in a proverb that warned not “to sell the bear’s skin before one has caught the bear”.
By the eighteenth century, the term bearskin was used to describe a commercial transaction,through the use of the phrase “to sell (or buy) the bearskin”.
It was also found in its reference to the middle man called a “bearskin jobber” who sold bearskins at some determined price before he received the actual bearskin. He hoped to make a profit on the difference between the price he paid for the skins and the price he sold it.
Soon the word bear came to mean a stock sold by a speculator as well as the speculator selling the stock (this is now called short selling).
Bears were said to sell a borrowed stock with a delivery date specified in the future. This was done with the expectation that the stock price would fall and it could be bought at a lower price allowing profit from the difference of the selling price.
The famous South Sea Bubble in 1720 saw more widespread use of the term as many people took to speculating.
The use of bull came into existence around the same time as a rival and equally powerful image to the bear. DeFreitas and Minsky point to when the London Stock Exchange was established in the 17th century there was a bulletin board where traders posted offers to buy different stocks.
A high demand for stocks meant a board full of bulletins, commonly called bulls and when there was little demand the board was ‘bare’.
The bull was associated with a person making a speculative purchase in expectation of a rising stock price.
Soon bull came to denote a market with a rising price and bear represented a market with falling prices. There is a bull and bond market for different securities such as bond, equities and commodities.