What Does Bullish Trend Mean in Stock Trading | Espresso

What Does a Bullish Trend Indicate?

The terms ‘bull’ and ‘bear’ are thrown around all the time in the financial world, and understanding them is a crucial step on the road to stock market investment.

Published on 15 June 2022

A bullish trend represents a rise in the prices of various assets and securities. The phrase "bull market" is commonly used as a reference to the stock market, but it is also applicable to whatever is being traded, from real estate and bonds to commodities and currencies.

What the Term 'Bullish Trend' Indicates?

The market is said to be bullish when the prices of stocks on major indexes rise by a minimum of 20% in terms of trade volume as well as purchase. However, different investors define bull markets in different ways: while some market participants will say that you can’t confirm a bull market until previous all-time highs have been exceeded, others believe a time component is essential to indicating stocks in a bullish market.

In contrast, a bear market signifies a sustained span of downward trending stock prices, typically 20% or more. During this phase, industries tend to start laying off workers, leading to a rise in unemployment and a crack in the investors’ confidence as they assume the prices will continue to fall, further perpetuating a downward spiral.

This sequence of events ultimately results in an economic downturn. Fortunately, bull markets tend to last longer than bear markets, with the average span of a bear market being under ten months, while bull markets have been known to last for years.

To outline, the terms ‘bull’ and ‘bear’ denote ensuing trends in a stock market based on whether they're appreciating or decreasing in value and whether investors’ outlook on the market is positive or negative in general.

What Causes a Bull Market?

Bull markets are more likely to be prevalent when a country's economy is boosting or is already powerful. Therefore, having large-cap companies with fundamentally sound policies to ensure adequate production and sale of goods and services is a crucial indicator of bullish trends in the stock market.

Bull markets tend to coincide with a strong GDP (Gross Domestic Product) and will most often be in line with the increase in profits of corporates. As a result, investor morale also tends to be high during a bull market phase. This, coupled with low unemployment rates and rising per capita income of individuals, leads to a rise in the speculative demand for shares, not to mention a substantial boost in Initial Public Offering (IPO) activity.

How to Identify a Bull Market?

The following market indicators can be used to recognise a bull run successfully:

  • Nature of market rally

When stock prices are moving at a sustained pace in a certain direction, it’s called a market rally. Whether a market is bearish or bullish depends not only on knee-jerk reactions to a specific event but also on how it functions over the long run.

Small movements upwards or down represent only a short-term trend or market correction, whereas an extended time period can determine the actual nature of the market. Thus, it is advisable to look at the broader picture of a rally to establish if it is indeed a case of the bulls being back.

  • Market Cap to Gross Domestic Product

The Market Cap to Gross Domestic Product ratio is a popular method to estimate if markets have bottomed out. The value of equity markets is believed to become more attractive when the M-Cap to GDP ratio goes above one.

  • Volatility Index:

The Volatility or Fear Index is commonly used to gauge the amount by which an underlying index is expected to fluctuate over the coming thirty days. Typically, a high Volatility Index implies that investor fear has grown.

  • Daily Moving Average

Another parameter to help you judge the first call on a bull market is the Daily Moving Average (DMA). The index will be above the 200 Simple Moving Average (SMA) in a bull market, and the stock value above its 200 DMA (at least major Nifty stocks). So as long as Sensex or Nifty stocks stay below their 50, 100, and 200 SDMA, the market will be deemed bearish.

Apart from these parameters, a bullish market is typically denoted by low-interest rates, low inflation, earning to bond yield ratio, Price to Book value (P/BV), easy monetary policies, and high liquidity. Therefore, it is necessary to consider historical data regarding the P/BV ratio to see how the multiples have performed in relation to the inherent value in the balance sheet.

To Sum It Up

Now that you know the significance of a bull market, investors and traders who wish to take advantage of it should purchase early to benefit from the increasing prices and then sell when they reach their peak. But, it’s difficult to determine the time at which bottoming out and peaking will occur. So, you can use myriad strategies such as Buy and Hold, Increased Buy and Hold, Retracement Additions, Swing Trading, etc., to turn a profit. But, of course, this also hinges on your age and how close or far you are to your long-term financial goals.

It’s important to note that bull markets are born out of excesses of bear markets and vice versa. It has been a cycle since time itself, as neither lasts forever. While bear markets can be scary for new investors, they are part of the economic cycle and often lead to more robust market returns. A diversified portfolio based on your financial goals can prepare you to face almost any market forecast with confidence.

Chandresh Khona
Team Espresso

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