Bull Markets vs. Bear Markets
As you begin trading in the spread betting arena, two of the most common terms you will hear will be Bull Markets and Bear Markets. While there is some debate over where exactly these terms originated, their meanings are clear: In Bull Markets, traders are generally optimistic and the majority of assets (stocks, commodities, and some classes of currency) tend to increase in value. In Bear Markets, traders are generally negative and the majority of assets tend to decline in value. There can be many reasons for why these large trends occur. But it is important for spread betting traders to understand the key characteristics of each type of market so that trading opportunities can be identified and gains can be captured.
The Main Elements in Bull Markets
The term Bull Market usually refers to any large group of assets with rising prices. The main elements of Bull Markets include investor confidence, widespread economic optimism, strong financial data and the general expectation that the positive price trends will continue. Broad stock indices (like the Dow Jones, S&P 500, FTSE100 and the DAX) tend to outperform their historical averages and investors are more willing to buy riskier assets as a means for generating larger gains. As Bull Markets build in momentum, it can be difficult to know when investor psychology has taken over and asset prices have become overvalued. In these cases, it is usually a wise idea to watch economic data, rather than news headlines or recommendations from other investors. Some classic examples of Bull Markets include the US technology stock rally in the 1990s, or the incredible performance of the Bombay stock exchange from 2003-2008.
How to Trade Bull Markets
Bull Markets tend to come at times where corporate earnings are strong and economic data (such as GDP or Retail Sales figures) are showing healthy improvement. Since stock markets tend to rise in these periods, spread betting traders can make gains from buying (going long) in the major stock indices or in individual growth stocks (smaller companies with wide potential for expansion). Certain types of commodities (such as Oil and Industrial Metals) do well in these environments, as there is usually an increased expectation for manufacturing demand. When trading currencies, high-yielding currencies (those with higher interest rates) tend to perform well, as stable markets usually reward strategies like the Carry Trade.
The Main Elements in Bear Markets
The term Bear Market usually refers to any large group of assets with declining prices. The main elements of Bear Markets include investor pessimism, a lack of economic confidence, weak financial data and the general expectation that the negative price trends will continue. Broad stock indices (like the Dow Jones, S&P 500, FTSE100 and the DAX) tend to underperform their historical averages and investors often look for “safe haven” assets to buy, as a means for protection against any major market surprises.
As Bear Markets build in momentum, investor psychology can be significantly damaged as general fear and concern takes over. Risky assets are shunned and it can be difficult to know when asset prices have become too undervalued. Here, it is again a good idea to pay special attention to economic data to find signs of economic growth and progress (sometimes referred to as “green shoots”) as this could be a sign the Bear Market is turning. Some classic examples of Bear Markets include the market declines seen after the Global Credit Crisis of 2008, or in the highly volatile markets that were seen during the Asian Currency Crisis in the late 1990s.
How to Trade Bear Markets
Since investor confidence is weak during Bear Markets, “safe haven” assets like the US Dollar, Gold and defensive stocks tend to perform well. While spread betters are likely to place “short sells” of the rest of the market’s assets, the general idea is to look for ways to limit risk and prevent against additional negative surprises. On the whole, stocks tend to perform poorly at these times, so spread betters are more likely to gain from selling stock indices like the NASDAQ (with its heavy tech-stock component).
Conclusion: Know the Prevailing Market Environment and Trade Accordingly
Knowing the current market environment is critical when looking to make gains in spread betting trades. There are certain asset classes that perform well in Bull Markets, and others that are seen as preferable during Bear Markets. It is critical to know which assets are likely to be bought and sold on each occasion and it is generally a better choice to trade with the prevailing trend. In Bear Markets, look to short sell most assets and buy only those assets in the “safe haven” category. During Bull Markets, “safe haven” assets should be sold as growth stocks and high-yielding currencies offer the greatest potential for gains.