“I find the great thing in this world is not so much where we stand, as in which direction we are moving.” – Supreme Court Justice Oliver Wendell Holmes
Stock trading is risky because even experienced forecasters can struggle to anticipate the market’s direction. At one moment sentiment seems positive, but then prices seemingly fall out of nowhere. On the other hand, it’s also possible for stock prices to climb in a declining market.
So in which direction is this market moving? Where does it stand?
We all have heard the terms “bear market” and “bull market” used to describe the nature of the stock market over a given period of time. These terms derive from how these animals attack their targets. Bulls charge with their horns pointed upward, while bears hit with downward swipes.
A bull market is one of high investor confidence and general optimism. During a bull market, stock prices generally go up because of positive economic factors, like low unemployment rates. A bear market is one of low investor confidence and pessimism. Stock prices fall during bear markets, which often overlap with economic recessions.
Complicating things is the idea of a bear-market rally. That’s when stocks climb despite the fact that the market on a whole has been on a downward swing. Since bear markets are marked by falling stock prices, an upswing can be a welcome sign for traders and investors. But it can also be dangerous.
At first glance, a bear market rally might seem like a good thing, because it’s a break from the downward spiral. But in reality, bear market rallies can be painful for investors who let down their guard and buy up stocks in the hopes that things are turning around on a long-term basis, only to then lose money when those rallies end and the market continues its ongoing slump.
The fact that it’s hard to distinguish between bear market rallies and new bull markets increases the risk of buying stocks — especially for short-term investors. Long-term investors don’t tend to get quite as burned when bear market rallies give way to plunging stock prices.
So where do you stand?