Bullish vs. bearish investors: What’s the difference?

Bullish vs. bearish investors: What’s the difference?

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If you follow the stock market at all, you’ve probably heard plenty of references to bulls and bears. But what do these animals have to do with investing? Let’s take a look at what people mean when they say someone is bullish or bearish.

What does it mean to be bullish?

When someone is bullish, it means they are expecting prices to rise over a certain period of time. The term applies to broad market indexes such as the S&P 500, specific industries or even entire asset classes such as real estate or commodities. It might help to think of a charging bull raising its horns to remember that to be bullish is to expect prices to charge higher.

A bull market has no specific definition, but is a sustained period when prices are rising and generally expected to keep doing so. Typically, a bull market is thought to have occurred when prices have risen 20 percent or more off a recent low. A bull market can last for years as it did with stocks starting from the lows of the financial crisis in 2009 until the global pandemic hit in March 2020.

What does it mean to be bearish?

On the other hand, to be bearish means to expect that prices will be falling over a period of time. This term also applies to any financial asset and could be used to describe an outlook for an individual stock such as Apple, or stocks in general. To help remember that bearish means falling prices, think of a bear clawing down on its prey.

A bear market is essentially the opposite of a bull market, meaning that it is a prolonged period of declining prices. A bear market generally occurs when prices have declined by at least 20 percent from a recent high. Bear markets have historically not lasted as long as bull markets in the stock market. The U.S. stock market entered a bear market in March 2020 when prices fell more than 30 percent in just a matter of weeks. But the recovery was nearly as swift, with a new bull market starting later that year.

How to invest during bull or bear markets

If you could anticipate when bull or bear markets were going to begin and end, you could adjust your investments accordingly to take advantage of the changing conditions. The reality is that once bull and bear markets become clear to investors, it’s probably too late to take advantage of the change.

For stocks, it’s important to remember that these are part of your long-term investment plan and you’ll experience both types of markets during your investing life. Stocks tend to go up more than they go down over time, so it’s likely that you’ll see more bull markets than bear markets. Consider holding low-cost index funds for the long-term and know that ups and downs are to be expected.

One approach that can help you take advantage of the market’s ebbs and flows is known as dollar-cost averaging. By making consistent contributions and investments over time, you’re able to buy more shares when prices are lower, and fewer shares when prices are higher. These contributions could be part of a workplace retirement plan like a 401(k) or your own traditional or Roth IRA.

Bottom line

Bulls think prices are going higher, while bears think they’re headed lower. Try not to get caught up in trying to anticipate when a bull or bear market might begin or end. Think of your investments as part of your overall financial plan and do your best to take a long-term view.

Learn more:

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

Opinion: What the stock market’s ‘black swan’ index hitting an all-time high tells us

In late June the CBOE’s SKEW Index — a.k.a the “black swan” index — hit an all-time high. That reading was more than 40% higher than its average since 1990, which is how far back data extend. In fact, the June reading was 20% higher even than the highest the SKEW reached during the U.S. stock market’s February-March 2020 waterfall decline.

This new high certainly seems scary. Yet I’m not convinced that the SKEW’s high recent readings mean that more traders than usual are betting on a sharp decline for the the U.S. stock market, including the Dow Jones Industrial Average DJIA, +0.68% , the S&P 500 Index SPX, +1.01% and the Nasdaq Composite COMP, +1.04% .

In fact, it’s possible that the higher SKEW index reading means just the opposite. (For a fuller discussion of the complexities of the SKEW’s calculation, see a February 2020 Wall Street Journal column I wrote on the subject.)

To illustrate, imagine there are two groups of investors: permabears, who more or less permanently think that stock prices are about to fall, and the mainstream consensus, which is bullish. In this hypothetical case, the SKEW Index in effect would measure the distance between these two groups’ forecasts.

Notice, therefore, that there is more than one way for the SKEW Index to rise. One way, which is what most assume is the case when the index rises, would be for the permabears to become even more bearish. But the SKEW Index would also increase if the permabears didn’t alter their bearishness and the mainstream consensus became more bullish.

There is some evidence suggesting that this latter possibility is happening now. Consider the Crash Confidence Index, a periodic survey introduced in 1989 by Yale University finance professor Robert Shiller. The latest results indicate no notable increase in the percentage of U.S. investors who believe the stock market is about to crash.

Other evidence pointing in the same direction is the increasing bullishness among short-term stock market timers. For example, timers my firm monitors who focus on the Nasdaq in particular are, on average, more bullish now than on 94% of all trading days since 2000. (That’s according to my firm’s Hulbert Nasdaq Newsletter Stock Sentiment Index, or HNNSI.)

It’s also worth noting that there’s more than one way for the SKEW Index to fall. Assuming the permabears don’t change their forecasts, the SKEW will fall if the mainstream consensus becomes more bearish. That’s because the distance between the two groups’ forecasts — what the SKEW measures — will narrow. So instead of a falling SKEW suggesting less concern about a market decline, it might instead be signaling increased concern.

All we know for sure from the SKEW’s recent all-time high, in other words, is that disagreement among investors is particularly wide right now. Though we don’t know for sure, my hunch is that this extreme disagreement traces to the already-bullish mainstream consensus becoming even more bullish. Contrarians should take note.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Also read: These 15 stocks — June’s biggest losers — could become July’s winners

Plus: If you’re thinking of buying gold, know that price gains are capped for now

Why a Bearish Oil Report was a Strong Bullish Signal for Stocks

As stocks were selling off on Monday, I wrote that the dip was driven by short-term trading factors, and that as long as the 50-Day moving average (MA) on the S&P 500 futures held, there was no longer-term cause for concern. I don’t wish to brag (who am I kidding – of course I do!), but that proved to be accurate as the chart below for the E-Mini futures contract (ES) shows:

The 50-Day MA held again, just as it already had on six separate occasions this year prior to yesterday’s crack at it. Then, in addition to that, yesterday saw another bullish signal in a place where not a lot of stock traders are likely to be looking right now: oil.

I learned early in my dealing room career that no matter how focused your actual trading may be, your research should be broad-based. No market exists in a vacuum, and an understanding of the other major traded markets – such as bonds, forex, oil, and gold, as well as stocks – gives you a sense of big money’s overall attitude to risk, an essential consideration in trading decisions in any market. Of course, every market has its own unique factors that influence it, so not every move in one has implications for another. Sometimes, though, you see a move that defies those internal influences on price which suggests that there is something else driving trading, something significant.

That is what happened in crude yesterday.

Every Wednesday, at 10:30 AM, the U.S. Energy Information Administration (EIA) releases its weekly report on oil inventories. Understandably enough, that report, which gives an insight into both supply of and demand for oil, is closely followed by traders and usually sets the market’s tone for at least a few days. Yesterday was different.

Yesterday’s EIA report showed that crude oil inventories in America had increased in the prior week, rather than decreased as the market expected. That would indicate that either supply was higher than anticipated, or demand lower. Either way, it should have been a bearish report for crude but, after trading lower in the first minute or two following the release, a period marked by the white arrow on the chart below, crude futures (CL) jumped:

It gets even more interesting when you consider the details of the EIA report. It showed that crude input actually fell on a week-to-week basis, meaning that the build of inventories was related to weaker than anticipated demand, not excessive supply. In a week when we saw such a massive drop in both stocks and oil on Monday on fears of just that – weak growth and demand – you might expect bad news like that to trigger another serious selloff, at least in oil.

It didn’t.

The fact that it didn’t, and that crude just continued its strong rally after a very brief pause once the numbers came out, speaks volumes about traders and investors’ attitude to risk as the week has progressed. The big drop in risk assets that we saw on Monday is now viewed as a bit of a panic, and as a good opportunity to buy those demand-sensitive risk assets, even in the face of bad short-term news.

This is why, even though I am nervous about being close to all-time highs and above average multiples of earnings while a pandemic is still raging around the world, I have stayed consistently bullish on stocks, and still am. There is an innate belief that things are going to get a lot better. That optimism will inevitably fade at some point, whether or not it’s tied to the pandemic, but as long as traders in all markets continue to ignore “bad” short-term news and focus on a positive outlook, stocks and other risk markets still have further to go.

Do you want more of Martin? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free newsletter with in-depth analysis and trade ideas focused on just one, long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.