One of the most fundamental concepts of investing is understanding what your expectations are regarding price. Put simply, do you expect the price to go up or go down for a particular investment? The notion of bullish and bearish essentially reflects that very expectation. In this article, we’ll explore this notion in greater depth and help you understand what bullish and bearish mean in investing.
Let’s get into it.
First, though, we’ll start with a brief overview of long and short to set the foundations.
This is important because an understanding of “long vs short” paves the way for understanding what bullish and bearish mean in investing.
Long vs Short – A Brief Overview
“Long” and “short” are two terms used to describe whether an investor expects to profit from the price of an asset rising or falling.
If the investor expects to profit from rising prices, the position they hold is a “long” position.
If the investor expects to profit from falling prices, the position they hold is a “short” position.
Put differently, going “long” in a stock involves buying a stock with the expectation of selling it a higher price in the future.
Going “short” in a stock on the other hand, involves entering into a position with the expectation of profiting from a decrease in the price in the future.
Now, while a thorough understanding of short selling isn’t crucial to understanding what bullish and bearish mean in investing, it’s certainly helpful.
And if this is something you’re unfamiliar with, we recommend reading our sister article on What is Shorting a Stock?.
Alright, let’s now think about the first of our two terms of interest- bullish.
Bullish and Bearish
What Is Bullish?
When the stock market is rising, investors have a sentiment about increasing prices to support their long positions.
When an investor holds a long position, they are said to be “bullish”.
This term is used to describe only what an investor thinks will happen.
It’s the basis for the decision they make about a position, be that a short term trading decision or a long term investing one.
The key idea is that investors expect the prices of stocks or the stock market in general to increase over time.
The origin of the term “Bullish” has been described quite interestingly in this article by Merriam-Webster. And we certainly recommend giving that a read in conjunction with our article here.
In terms of the rationale for the term “bullish”, there’s largely two main perspectives.
One perspective is that if you buy into a long position and hold on as prices rise, you must hold on for dear life, like you would in bull riding, before you sell.
An alternative perspective sees the ‘Bull’ as a strong contender to the other ‘beastly’ animal, the ‘Bear’.
Regardless of which perspective one takes, the fundamental idea is an expectation of increasing prices of securities in the financial market.
What Is Bearish?
Bearish is, as you might imagine, the exact opposite of bullish. It is the investor sentiment that supports a short position in the market.
If an investor holds a short position, they are said to be “bearish.”
While at face value it may seem to simply be the antithesis to bullish, it’s not quite as simple.
You might think the use of bears in this meaning is because of some sort of hibernation (that the animals tend to conduct). But it’s nothing to do with that.
As with most things in Finance and Investing, everything starts with a market.
One story is that the term gained prominence as a result of fur traders in the 18th century who sold skins of bears they hadn’t caught yet.
Another story suggests that the term’s popularity increased as a result of the South Sea Bubble in 1720 when many speculators allegedly sold stock they did not own.
This is the simplest metaphor for how modern day shorting works – selling stock that you don’t own yet in order to profit from its fall.
It’s important to note that while supporting a short position implies one is bearish, the reverse is not necessarily true.
In other words, one doesn’t have to open a short position to be bearish.
Remember that “bearish” is a general sentiment that an investor holds about where prices are going.
Any decision an investor makes in support of that decision would also be bearish.
This means that if you sell out of a position because you think that the market will shortly drop sharply, you are making a bearish play in the market.
What Is a Bull Market or Bear Market?
This connotation is used to describe not only individual stocks but also markets as a whole.
Bullish and bearish positions happen all the time, but bull and bear markets make the playing field more complicated by having defined formations and defined investor behaviors.
After all, the period between 2009 and 2020 was the longest bull market in history, but it was followed shortly by a sudden bear market as a result of the Covid pandemic.
A bull market tends to last longer than a bear market. And it also tends to convey a more stable economy.
There is a general high demand, low supply environment to support a steady rise of prices of all assets.
And investors are generally holding bullish positions to profit on the rising markets.
It’s also reasonable to expect relatively high levels of employment, productivity, and investor confidence during a bullish market.
Put simply, bull markets are most investors’ “Disney Land”. The same holds for governments given high economic growth.
While perhaps not having a quantitative definition, it is safe to infer that a bull market exists in the absence of a bear market.
A bear market, on the other hand, does have a quantitative definition. It is typically defined as a stock market that has dropped at least 20% from recent highs.
It is characterised as a mass exodus away from risk and toward safer assets like cash and fixed income securities like bonds.
A bearish market is generally a result of fear, anxiety, and investor panic.
It’s a situation where the market sentiment in general is rather bleak. And a downward trend persists with almost no end in sight.
The “smart money,” as they say, tends to be first out since they have a firm grasp on what is happening and what the ramifications are.
The sharp drop in equity prices across the board tends to cascade to other investors, who will quickly see the shocking drops and panic sell to protect what they have left.
Essentially, it’s a vicious cycle that constantly reinforces and results in a deteriorating market trend, coupled with increased volatility.
RELATED: Why Are Equities Volatile?
Is Bullish Better Than Bearish?
Once you become more comfortable with the financial jargon, you’ll start to appreciate the terms used in the industry.
That being said, whether one is better than the other is purely dependent on your point of view and your investing style.
There are bearish traders who specifically seek out stocks that are struggling. And they hold short positions waiting for markets to catch up and sell out of positions.
Just because you sell out of positions in a bearish move doesn’t necessarily mean that you’re a bad investor or you’ve made a bad investment decision.
We would always recommend (in general) that you do not sell if you consider yourself a long-term, buy-and-hold investor. That’s because the market has, for centuries, proven that bear markets tend to reverse.
Naturally, the decision to sell is very much a function of your investing goals.
Liquidity (the need for cash) can result in selling even if you’d rather not.
Thus, if you sell or go into bearish positions based on where you think prices will go, you have simply chosen a side.
And that is nether bad nor good. It just is what it is.
Do Some Market Sectors Do Better In One Over the Other?
There are certainly sectors that tend to not drop quite as much in a bear market. Though it’s not always the same sectors.
For example, when the Covid pandemic began…
It was clear that almost every sector would be affected at least at the start.
When it was clear that travel would be most affected, that sector felt the biggest punch.
Alternatively, when the supply chains proved to hold in most cases, consumer staples – that is, grocery stores, hygiene products, beverages and alcohol companies – showed resilience.
Many investors would’ve also simply sold positions into cash or bought bonds.
What’s Next: Bearish and Bullish
Bearish and bullish are terms that refer to the investor sentiment that provides a basis for where an investor believes prices of assets will go.
Once they arrive at that sentiment, they can decide whether they will open a long or a short position.
One does not necessarily have a good or bad connotation over the other.
That being said, bear markets are typically the least desirable. That’s because they tends to mean many people lose money.
There is so much to understand about the mechanics of a bull and bear markets.
As well as some of the strategies you can implement to go either way.
Don’t hesitate to seek assistance to navigate the learning curve and achieve above average returns.
Our rigorous finance and investing courses are definitely a great place to start, even if we say so ourselves.
That’s a wrap for this particular article. Keep learning, keep growing!