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Bull markets, bear markets and stock market rallies.

May 12th, 2009 · Greg Atkinson · 4 Comments

Over the last year or so I have noticed that many investors get very emotional when talking about bull markets, bear markets and stock market rallies simply because they misunderstand what the terms mean. Often this emotion stems from the fact they have made losses or their investment plan has not performed quite the way they would have liked, and sometimes the reason for this is they did not fully appreciate what bull and bear markets actually are.

As regular readers of this blog will know I am a long term bull regarding the global economy. However people often appear to think that this means that I am saying the global economy will recovery from here without any problems and everything will get back to normal.

Actually all I am suggesting is that over the long term (meaning 5+ years) that the global economy will continue to expand just as it has for hundreds of years. There will bumps, bubbles, scandals, disasters as has happened over the entire span of modern human history, but eventually we normally bounce back.

The alternative is that the world has entered a period of long term decline where the demand for just about everything will be reduced. (except food, water and shelter) In theory I guess the global economy could decline to a certain point and move sideways forever but how likely is that?

So then what exactly is a bull market and what does being bullish actually mean? Technically speaking all a bull market means is that the long term stock market trend is upwards. It does not mean the market will head up forever nor does it mean there will not be nasty corrections. It simply means that a stock market low has been reached and that from this low the market will move up.

Pretty simple hey? Well yes, except that there can be different types of bull markets and people who are “bullish” can range from the cautious (that’s me) to the fantastically optimistic. To makes things even a little more confusing there is no international standard that defines a bull market in terms of time so the bull run could be quick and sharp or long and fairly shallow.

This then leads to confusion because some people equate a bull market will a spectacular rally in stock prices and think it is a road to riches. In fact you can go quite broke by investing during a bull market simply by buying shares at high prices and then getting wiped out when the inevitable bear market comes along. If you think about, investing in a bear market although risky, can often turn out much better than ploughing into the market at the top of a bull market run.

Bear markets are basically the opposite of bull markets and in simple terms mean the markets are on a long term trend downwards. But a “bearish” stock market does not mean that stock prices will decline forever and that there will never be another bull market. Some analysts and market commentators may simply be bearish about the stock market over the short to medium term but expect another bull market to come long, whereas others will suggest the bear market will be long and that another bull run will be years away.

The simple undeniable fact is that nobody on planet earth knows exactly how the stock market will perform tomorrow let alone over the next months or years. As with all forecasting, the further out we go in terms of trying to predict what will happen the less likely we are to be right. Sometimes we might get it right, sometimes we will get it right simply because we got lucky, but much of the time we will be wrong. Such is life.

Another investing concept that tends to stir emotions are rallies. Suggesting the stock market may be in a rally during a bear market tends to get a lot of people jumping up an down about something called a “sucker’s rally”.

Frankly I tend to stay away from such debates since the term suckers rally can be applied to everything from a correction after a rally during a bear market (but then the market recovers and heads up again) to a what I would call a true suckers rally; which would mean the market heads all the way back down, breaks through the previous low, and keeps going down to a new low. (quite nasty indeed)

Basically speaking, a rally is a period where the stocks head up over a few days but having said that, it is not a term that has a concrete definition. One thing is for certain though, rallies do not last forever and you should be aware that they do not always indicate the economy is recovering.

As I have stressed a few times in other articles, the stock market tends to rise and fall before other economic indicators. (such as GDP figures, employment numbers etc) Therefore the recovery of the ASX All Ordinaries since the lows of March does not mean the Australian economy is now recovering, it just means investors feel a recovery is coming and most of the damage to company earnings has already been priced into stocks.

So in a nutshell I expect bull markets, bear markets, rallies, routs, business cycles, booms, bubbles and busts to be part of investing. I might invest on the basis that I believe global demand for good and services is on a long term trend upwards, but I am always cautious and appreciate that investing in anything involves an element of risk.

Finally let me leave you with some wise words: (not from me of course)

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.
Peter Lynch.


4 responses so far ↓

  • 1 Ned S // May 16, 2009 at 8:41 pm

    This bloke is a smart man (for mine anyway):

    http://www.eurointelligence.com/article.581+M54f756d50c9.0.html

    He is described as follows: Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

    A few months back, Das changed his tune to something along the lines of “Inflation might better” – As in he’d had a real good chance to think about just how badly the real world was going to get hurt, as opposed to just a few naughty banks maybe?

    I saw him quoted very recently by a freebie American stock market commentator who is really quite limited (in my opinion) – But I follow him because he sometimes references Das. At one level the freebie seemed relatively bright and breezy:

    http://articles.moneycentral.msn.com/Investing/SuperModels/in-an-economic-desert-signs-of-life.aspx

    “This sort of muddling through is probably the next phase of the economic cycle. The path ahead that seemed so foggy six months ago is clearing up. It’s not a walk through a rose garden, but neither is it the twisted path in a dark forest filled with ogres that it seemed in November.”

    While re Das he commented:

    “Satyajit Das, the international banking specialist who has helped guide us along this path for the past two years, told me over the weekend that the chance of collapse now is lower but the chance of a prolonged period of low growth is higher — more like the 1960s and ’70s than the 1930s.

    If that’s the case, then a rotational market environment like the one described last week will become more likely, as investors capable of riding rolling waves of liquidity and hope in certain sectors like cyclicals or retailers, and exiting just after they crest, will be successful, and those who try to hold through it all will suffer.”

    I know you see similarities between the 1987 crash and now, but what I’m seeing is stuff way more closely aligned with the 1970’s stagflation times.

  • 2 Greg Atkinson // May 18, 2009 at 7:30 pm

    Ned S – Actually I see similarities between all stock market crashes, I just mentioned the 1987 crash because I thought it had more in common with the current mess than the Great Depression.

    Thanks for posting the links. Das makes some interesting points and I guess we will only know in a couple of years if he was right or wrong.

    I agree that the 1970’s is also an interesting period to look at especially when we consider that in the U.K big government spending actually made the situation worse, not better. I am guessing Rudd hopes his spending plans are more successful!

  • 3 Ned S // May 18, 2009 at 9:51 pm

    Greg – Das was one of the blokes who saw the current problems coming. That’s why I try to keep an eye out for what he writes.

    As for poor old Kev, he went from this on the morning of 10 October 2008 re bank deposit guarantees:

    http://www.abc.net.au/news/stories/2008/10/10/2387244.htm

    to this on 12 October 2008:

    http://www.abc.net.au/news/stories/2008/10/12/2388681.htm

    About as clueless as a bloke could be I’d say. Mr Bush had a quiet chat to him on the evening of 10 October you may recall:

    http://www.news.com.au/dailytelegraph/story/0,22049,24588155-5006010,00.html

    I was following events very closely at the time and got the distinct impression that Mr Bush must have whispered something along the lines of the following in Rudd’s ear at that time – “Kev, America has a serious problem – So kid, you better believe you’ve got one too!” to see the amazing backflip he did at the time.

    http://www.news.com.au/dailytelegraph/story/0,22049,24588155-5006010,00.html

    The media got all sidetracked later re that phone call as to whether Mr Bush knew what the G-20 was. Useless.

    So yes, anyone who thinks Kev (and even less the media) has any idea how this is going pan out is listening to the wrong people. But I’m very happy to get whatever hints I can from the likes of Das.

    I want to have a good close look at the major recessions we have some history on. To try to get some sort of vague feel for the possibilities myself.

    Re 1987, one thing that seems very similar to this time around re the American markets at least was that there was a panic with a sudden crash resulting. Pretty much from a high in 1987. And from a she’s going down, but these things happen and it must all turn around soon mentality in America this time.

    I know I need to do a lot more reading on it all though.

  • 4 Greg Atkinson // Jul 8, 2009 at 11:32 am

    Ned S – Kev has been all over the place regarding the economy from day one. First we had an inflation problem and Howard had not spent enough on infrastructure. Then there was a economic storm brewing but Australia would be okay because the economy was great then Rudd did a pretty quick switch to “we are facing a national emergency”. Now the message seems to be don’t worry about the debt because we are going to bounce out of the national emergency in no time. Oh and now Rudd says Howard did not save enough from the boom years.

    Thanks for the links..they show how all over the place Rudd is.

    Confused? I am 🙂

    A couple of points come to mind:

    1. If Howard spent more during the boom years this would have pushed inflation higher, there would be no Future Fund and Swan would not have been given a pile of crash to blow on school halls and pink bats.

    2. We as a nation cannot be okay unless our trading partners are okay. So I have no idea what was in Rudd’s tea when he was on about Australia would ride out the economic storm okay..the fact is the storm is just hitting us now.

    3. If the Government and Treasury reckon Australia will bounce back to growth and all will be okay then why did they blow all our money on wasteful spending measures?!?

    I just fail to see much logic in what they are doing.

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