Bull Market

What is a bull market by definition, and what are its characteristics? This, and more, you’ll learn in this article.

What is a Bull Market?

By definition, a bull market is a bull market as long the price of the market remains within the top 20% price range in major market indexes like the S&P 500 or Dow Jones Industrial Average.

During a bull market, investor confidence and optimism drive up demand for stocks and other risk assets, fueling the upward trajectory. Investor risk appetite increases as they expect prices to continue climbing.

Trading volumes tend to be higher than usual in a bullish market sentiment because more investors try to take advantage of bullish market conditions and ride the upside-wave as long as possible.

Characteristics of a Bull Market

Key characteristics of a bull market environment include rising stock and asset prices across most sectors and securities, high trading volumes as investors actively buy and sell, overall positive market sentiment and optimism about the future among investors, and indications of strengthening economic productivity and growth.

Companies tend to have an easier time raising capital through stocks and bonds to fund expansions, hire new workers, increase research and development spending, and make acquisitions during bull periods when risk appetite is boosted.

Measuring Bull Markets

While the precise definition can vary, financial experts generally consider markets within the highest 20% price range in a benchmark stock index like the S&P 500 a bull market.

If the market goes below that level, it enters the bear market territory; however, if the market goes back to the upper 20% price range, it will be the start of a new bull market.

The length and percentage gain required can differ across sources. Some see it the way that only the price level indicates if the market is in the bull or bear market zone. However, some investors see it this way: a market that stays in a bear market for a minimum of 2 months before a regain to the top 20% can be interpreted as a new bull market. The idea behind it is to avoid false-positive signals.

Bull Market vs Bear Market

Bull and bear markets are the contrasting periods of rising and falling asset prices that make up the market cycle. They tend to transition back and forth in a cyclical pattern over time to their mean as periods of investor optimism and pessimism ebb and flow.

A new bull market is considered to have begun once major indexes rise 20% from their bear market low. Conversely, a 20% decline from recent highs marks the start of a new bear market after exiting a bull phase.

Causes of Bull Markets

There are a variety of potential fundamental drivers behind new bull market cycles.

For example, strengthening economic data like GDP growth, low interest rates that make borrowing cheaper, and surging corporate profits that boost earnings and stock prices.

In addition, paradigm-shifting new technologies create opportunities and, importantly, raise investor confidence and risk appetite.

As sentiment turns more optimistic, buyers drive demand and push prices higher across different asset classes. Improving economic conditions and profitability fuel the buying momentum.

Bull Markets Benefits

One of the primary benefits of a bull market is the ability to generate substantial portfolio gains as prices rise across different sectors and securities.

That means that if you have a diversified portfolio with stocks or ETFs, which assign capital to various sectors, the bull market is the best market type you can get.

Consumer confidence also tends to increase during bulls as individuals feel wealthier from investment gains, which can drive up spending and economic growth.

However, bull markets can also create risks like asset bubbles if valuations become excessive compared to fundamentals.

What happens if a bull market bubble bursts can be seen in the stock market crash (dot-com-bubble-burst) in 2000/2001 and the financial crisis in 2007/2008.

Is a Bull Market Better for Day Trading?

Yes, a bull market is better for day trading. That’s because in a bull market, traders tend to go long, and stocks can always be bought. In contrast, those who want to short in a bull market trade against the primary trend, which is a disadvantage since stocks tend to rise in a bull market.

The main problem for day traders in a bear market is that, on the one hand, the primary trend is down, so shorting makes sense, but not every stock is available for shorting, and those who might require high borrowing fees.

Conclusion

Stock markets tend to rise most of the time, only shortly interrupted by short but sometimes hefty bear markets. With markets at all-time highs in 2024, it’s apparent that those who invested continuously now look at a well-performed portfolio.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.