A bullish market trend is represented by rising stock prices of various securities in the market, especially equity instruments. Growth of at least 20% or more has to be registered by several stock exchanges in terms of trade volume and purchases to be categorised as a bull market.
During this time, investors generate high expectations regarding the stock market performance, and pool their money readily into this sector. An increasing consumer confidence level, subsequently increasing the cash flow into this sector, allows companies to increase annual turnover, which leads to higher profits to be disbursed among shareholders.
In this article
How to Recognize a Bullish Market?
As stock market prices are constantly fluctuating, identifying a bullish market can be challenging. Also, the definition of a bull market differs as per the investing goals and period of holding, as intraday traders can consider a periodic high as a bullish trend.
However, a universal understanding of stock market bull can be defined as a prevalent high (for at least two months) with a significant increase in the stock prices by a minimum of 20% or more.
Such indicative bullish trends can be identified through the flowing parameters –
- Market rally
Any sustained movement of the stock prices in any direction is termed as a market rally. A share market bull rally for an extended period mainly occurs due to expansionary demand-side policies, such as lower interest rates and extensive tax rate cuts. Governments can also undertake extensive expenditure for the development of the country, through infrastructure construction, building schools and medical centres, etc.
An increased income level due to such expansionary policies ensure sufficient funding available for investment in the stock market, thereby increasing the stock prices owing to higher speculative demand.
- Volatility index
A rising volatility index is a major indicator of a bull market, as price fluctuations are more significant during a bullish market trend. The volatility of the Indian stock market is indicated by the NIFTY index option prices, which reflects the sensitivity of all securities listed on the National Stock Exchange (NSE).
- Lower bond yields
Zero risk securities are often associated with lower interest rates during a share market bull. This encourages investors to pool their money in equity instruments available in the stock market, at higher associated risks.
How Does It Affect a Country?
A booming economy caused by substantial monetary or fiscal stimulus creates significant income in the hands of residents, which lead to higher demand for goods and services available in a country. Speculative spending of individuals is on the rise as well, reflecting an upward trend in the average stock prices of listed securities.
A positive outlook regarding stock market performance drives prevailing prices higher, ensuring ample cash flow with respective public limited companies. This, in turn, creates high turnover, thereby increasing total output generated. GDP of a country, calculated through the market value of total goods and services manufactured in an economy rises owing to such an increase in productivity levels.
On the demand side, high rates compensate for an increase in the supply through increased productivity, thereby increasing the standard of living of resident individuals. This leads to the sustainable all-round development of a country, with lower unemployment rates and reduced poverty, especially in growing nations.
Causes of a Bull Market
- Strength of an economy
A bull market is prevalent in countries having fundamentally sound policies in place, along with proper implementation regime to ensure adequate production of goods and services, and suitable market conditions facilitate sales.
- Foundation of large-cap companies
Large-cap companies are the primary component in the major benchmark indices, which serve as a crucial indicator of stock market bull or bear. Unsystematic fluctuations tend to affect small and mid-cap companies more, which can bear a false indicator regarding the overall market trend regarding growth. Bullish markets are mainly reflected through rising benchmark index points, as large-cap companies demonstrate significant advancement having long term effects.
- Business cycle fluctuations
The business cycle comprises an upward swing known as boom period of an economy, when the productive capacity and growth rates rise substantially, as indicated through rising GDP rates and bullish market trends. Also, the unemployment rates in a country are significantly low, with rising per capital income of individuals. With more money to spend, speculative demand is on the rise, indicating a bullish market trend.
Bull Market – History
Every modern economy with a functioning capital market has recorded bullish market trends characterised by the sustained growth of more than 20% in the overall stock prices. Such market trends led to significant GDP growth rates and all-round development of the respective countries, indicating a high degree of prosperity.
One of the major bull markets recorded in history is the 2006 asset bubble created by historically low-interest rates on mortgages, along with high exuberant lending strategies to subprime lenders (having a poor credit history). An overinflated housing bubble created a stock market bull, wherein investors from all across the world pooled their money to generate gains through this sector.
A leading financial institution Lehman Brothers Holding Inc. reported the highest ever profits of US$ 4.2 billion during this period in 2017, with a revenue of US$19.3 billion.
Another major bullish trend occurring in India was caused by ‘The Big Bull’ Harshad Mehta, who manipulated the stock prices through funds embezzled from public sector banks to realise profits. This created a positive outlook towards the stock market investments, leading to a bullish market trend encouraging beginners to partake in such funds as well. This led to subsequent profits realised in the long run, indicating a bull market trend.
Bull vs Bear
While a bull market reflects an increase in the average stock prices, a bear market occurs when the stock prices start falling. Standard economies are likely to face a corresponding fall in investment patterns after an extended period of an optimistic outlook, as a part of business cycle fluctuations.
|Average stock prices||20% or more rise||20% or more decline|
|Investment||In large, mid and small-cap companies||In large-cap companies only|
What Should Investors Do?
Bullish markets allow all functioning companies to thrive for an ample period, which is indicated through increased profitability and top-line revenue, leading to a rise in the stock prices. Robust growth of such companies allows individuals to gain from their respective investments– through timely pay-outs and capital gains.
Investors choosing to build their portfolio through large-cap companies can benefit from periodic dividend payments, while individuals investing in small and mid-cap companies enjoy robust gains during the resale of procured securities. This leads to long term gains of investors, who can choose to resell their securities at the peak of the business cycle.
In a bullish market, the ‘buy and hold’ strategy is most useful, as investors choosing to withhold their securities are bound to realise dividend yields. Also, substantial capital gains can only be enjoyed if investors choose to hold their securities until prices rise significantly.
Increased ‘buy and hold’ policy is often undertaken by investors who are well-versed with the working of the stock market, who continue purchasing securities till the upward trend in stock prices prevails. This increases the overall capital gains, realised once the market readjusts post-market correction, which leads to higher stock prices.
Thus, bull markets are an excellent time frame for beginners to start investing in the stock market, as chances of incurring substantial losses are minimal. Most companies having a developed foundation can reap significant profits during this time, ensuring returns at 15-20% on principal investment value.
While large-cap companies distribute such profits through timely dividend pay-outs, small and mid-cap companies often choose to reinvest the same in for future growth. Gains from such investments can primarily be realised through the resale of securities. Though gains in this method are relatively more compared to the same amount of investment in large-cap companies, individuals should look into the credentials of the company to ensure the investment is not a value trap, wherein the reason behind excellent performance of the company in the bullish market outlook, and not internal factors. The price to earnings ratio can be scrutinised in this regard, which compares the relative price of a security with the earnings generated per share.
Keeping in mind all respective parameters, any investment strategy in both large and small and mid-cap companies is bound to generate substantial wealth in the long run.