If you spend any time around traders or financial news, you will constantly hear references to bulls and bears. These animal metaphors are fundamental to how market participants describe sentiment and expectations. Understanding what they mean and how to identify them is crucial for making informed trading decisions.
What Do Bulls and Bears Mean?
The terms bulls and bears describe two opposing views on market direction:
- Bulls: Traders who believe prices will rise. They are optimistic and expect growth.
- Bears: Traders who believe prices will fall. They are pessimistic and expect decline.
Why these animals? The most popular explanation relates to how each animal attacks. A bull thrusts its horns upward, while a bear swipes its paws downward. These movements mirror rising and falling prices.
Bull Markets vs Bear Markets
Beyond individual sentiment, the terms describe overall market conditions:
Bull Market Characteristics
A bull market is typically defined as a sustained period where prices rise 20% or more from recent lows. Bull markets are characterized by:
- Rising stock prices across most sectors
- Strong economic growth and employment
- High investor confidence and optimism
- Increasing trading volume on up days
- More stocks making new highs than new lows
Bear Market Characteristics
A bear market is typically defined as a decline of 20% or more from recent highs. Bear markets feature:
- Falling stock prices across most sectors
- Economic contraction or slowing growth
- Fear and pessimism among investors
- Increasing volume on down days
- More stocks making new lows than new highs
Historical Market Cycles
- 2009-2020 Bull Market: 11 years, S&P 500 gained over 400%
- 2020 COVID Bear Market: 33 days, S&P 500 fell 34%
- 2020-2022 Bull Market: 21 months, S&P 500 doubled
- 2022 Bear Market: 9 months, S&P 500 fell 25%
How to Identify Market Sentiment
Several indicators help you determine whether bulls or bears are in control:
Technical Indicators
- Moving averages: Prices above the 200-day MA suggest bullish conditions
- Trend lines: Higher highs and higher lows indicate bullish trends
- RSI: Above 50 suggests bullish momentum, below 50 suggests bearish
- MACD: Positive readings indicate bullish momentum
Sentiment Indicators
- VIX: Low VIX suggests bullish complacency, high VIX indicates fear
- Put/call ratio: Low ratio suggests bullish sentiment, high ratio suggests bearish
- AAII sentiment survey: Measures bullish vs bearish retail investor sentiment
- CNN Fear and Greed Index: Combines multiple sentiment measures
Market Breadth
- Advance/decline line: Rising line confirms bullish trend
- New highs vs new lows: More highs suggests healthy bull market
- Percentage of stocks above 200-day MA: High percentage confirms bull market
Trading Strategies for Bulls
When you are bullish on a stock or the market, consider these strategies:
- Buy and hold: Purchase stocks and hold through the uptrend
- Buy the dips: Add to positions during temporary pullbacks
- Call options: Buy calls for leveraged upside exposure
- Bull put spreads: Sell put spreads to collect premium while bullish
- Covered calls: Generate income on stock positions during gradual rallies
Trading Strategies for Bears
When you are bearish, these strategies can profit from declining prices:
- Short selling: Borrow and sell shares to profit from price drops
- Put options: Buy puts for leveraged downside exposure
- Bear call spreads: Sell call spreads to profit from sideways or down moves
- Inverse ETFs: Use inverse funds like SH or SQQQ for short exposure
- Cash: Sometimes the best bearish strategy is simply avoiding losses
Important: Shorting and bearish strategies carry unique risks. Losses on short positions are theoretically unlimited, and bear markets often have violent rallies that can hurt shorts badly.
The Psychology of Bulls and Bears
Understanding market psychology helps you trade sentiment effectively:
- Greed drives bulls: FOMO (fear of missing out) pushes prices higher
- Fear drives bears: Panic selling accelerates downtrends
- Sentiment extremes reverse: Extreme bullishness often precedes tops, extreme bearishness precedes bottoms
- The herd is usually wrong at turning points: When everyone is bullish, consider being cautious
Contrarian Signals
Look for these extremes that often precede reversals:
- AAII bullish sentiment above 50%: Potential market top
- AAII bearish sentiment above 50%: Potential market bottom
- VIX below 12: Complacency, potential pullback ahead
- VIX above 40: Panic selling, potential bottom forming
Adapting to Changing Conditions
Successful traders adapt their approach based on market conditions:
- In bull markets: Stay long, buy dips, use momentum strategies
- In bear markets: Reduce exposure, hedge positions, focus on capital preservation
- In transitions: Be patient, reduce position sizes, wait for clarity
The key is recognizing when conditions are changing. Bull markets do not last forever, and neither do bear markets. The traders who succeed long-term are those who can identify transitions and adjust accordingly.
Common Mistakes to Avoid
Both bulls and bears make predictable errors:
- Fighting the trend: Stubbornly staying bullish in a bear market or bearish in a bull market
- Confirmation bias: Only seeing information that supports your existing view
- Leverage at extremes: Adding leverage when sentiment is extremely one-sided
- Calling tops and bottoms: Trying to perfectly time market turning points
Track Your Bull and Bear Trades
Pro Trader Dashboard helps you analyze your performance in different market conditions. See whether you do better in bull or bear markets and adjust your strategy accordingly.
Summary
Bulls believe prices will rise while bears believe they will fall. Understanding market sentiment helps you choose appropriate trading strategies and avoid fighting the trend. Use technical indicators, sentiment measures, and market breadth to gauge whether bulls or bears are in control. Most importantly, stay flexible and adapt your approach as conditions change.
Ready to learn more? Read about bull market characteristics or explore bear market strategies.