Bullish vs. Bearish Investors: Which Are You?

After the March 2020 stock market crash brought on by the COVID-19 pandemic, the U.S. stock market saw immense gains. In fact, the 2020 market recovery was the fastest in history, doubling from its low after just 354 trading days. However, the vicious market correction and growth stock sell-off in the first half of 2022 has made many investors think twice about continuing to add to the high-priced growth sector of the market.

But just as many investors sold out of their shares in 2022 in panic as losses reached 20% and more, others viewed the correction as a good time to buy and expect stock prices to continue going up by the end of 2022. This present-day, real-world situation is a great example of bullish vs. bearish investors.

At a basic level, those who have reacted to the correction by buying more stocks are the bullish ones, because they expect stock values to reverse course and keep trending upwards. Meanwhile, those who have stayed out of the market or sold off their stocks in 2022 are the bearish investors.

Are You a Bull?

What does being bullish mean? If you have either a long or short-term positive sentiment towards an individual stock, , a stock index or the overall market, you’re bullish. For example, if you’re bullish on McDonald’s because their earnings went up in the last quarter, that means you would expect McDonald’s stock value to go up. In anticipation of this, you might even buy more shares.

When enough investors act this way, their belief becomes something of a self-fulfilling prophecy, as having more buyers than sellers pushes up the shares of any stock. When shares trade up, the market in general is said to be bullish on that stock.

Ways to Be Bullish

Even if you don’t think the stock market will do well, you can be bullish in other areas. For example, you may be bullish on gold because you anticipate the stock market will dip and inflation will rise in the coming years, making gold desirable as a store of value.

As Jim Cramer on CNBC’s “Mad Money” likes to say, “There’s always a bull market somewhere.” This means that even if the market as a whole is going down, there are always certain stocks or sectors or even alternative investments, like gold, that may be going up.

The term bullish is also commonly used to talk about individual stocks themselves. A stock can be called bullish if the sentiment towards it is generally positive or if it has been rising in value for a period of time.

Common reasons for a stock to be bullish are positive company news, merger and acquisition activity or rising earnings. You’ll sometimes hear the phrase “making bullish moves” when referring to a stock that has been climbing.

Or Are You a Bear?

In investing terms, you’re a bear if you think the value of either the total market, specific equities or certain sectors will fall. In short, it’s the opposite of being bullish. Like those who are bullish on stocks or equities, you can be equally bearish on just one stock or one security, such as a company like Amazon or a separate asset class like gold or silver.

If many people are bearish on an individual stock or the market as a whole, its value can drop. This is the opposite of what happens, of course, when many people are bullish on a stock or the stock market.

When investors are extremely bearish on a stock, they might sell it short. This is a bit of an advanced trading strategy in which investors borrow shares of stock and sell them, hoping to buy them back later at a lower price. In the case of company bankruptcy, a short seller hits the jackpot. As the shares are now worthless, the short seller never has to buy them back, meaning they keep the complete sales price as pure profit.

However, this strategy is only recommended for the most experienced of investors, as the potential losses here are theoretically infinite.

Bullish vs. Bearish Market

As with investors and stocks, a market can also be bullish or bearish. A bull market is generally defined as a period of consistent, overall upticks in the market, whereas a bear market is defined by a sustained decline in the prices of the when the prices of the overall market.

Defining Bull and Bear Markets

The most commonly accepted metric for determining a bear market is a 20% fall from a recent peak, but there is no universal or official measurement for a bear market. The same is true for a bull market, which is typically defined as a 20% rise over recent lows.

Regardless of the percentage price movement, however, investors generally define bull and bear markets based on general price trends and overall sentiment.

For example, a market that slowly grinds its way higher and rarely seems to have a down day is generally classified as in a bullish trend, even if it hasn’t yet reached the somewhat arbitrary target of a 20% gain to be a classically defined “bull market.” The same is true with bear markets, in which sharp rallies tend to be followed by punishing selloffs.

Recent Market Conditions

For the past decade or so, the U.S. stock market has generally been in an amazing bull market, one that has paralleled the expansion of the U.S. economy.

However, the punishing bear markets of 2020 and 2022 interrupted that smooth, upward flow. While the recovery from the 2020 bear was remarkably quick, investors are still hoping for signs of a sustained turnaround from the brutal first half of 2022.

Trends After Bull vs. Bear Markets

Although economic expansion isn’t necessarily a prerequisite for a bull market, and recessions don’t always follow bear markets, the two tend to go hand in hand. According to research from CenterPoint Securities, for example, eight of the 11 bear markets since 1948 have been followed by recessions.

However, bear and bull markets can be cyclical, not always lasting for years at a time, and can actually be mere weeks or months in length.

A bear market is also not to be confused with a correction. A correction is typically much shorter in duration and is usually defined by a 10% dip in a market index. Corrections by definition always precede bear markets, but corrections don’t always become bear markets.

Origin of the Terms “Bull” and “Bear”

It is said that the term “bear” came first in investing and “bull” came afterward to act as a counter. Regardless of which one came first, the terms bull and bear are said to have come from the two ways the respective animals attack.

A bull will charge forward and rear its horns up, while a bear will swipe its paw down — attack directions that are parallel to investors’ anticipation of the market direction.

There are quite a few other interpretations too. Researchers have had theories ranging from 18th-century bearskin trading to bull- and bear-baiting.

Investing in a Bear Market

Is it good to buy bearish stocks? For long-term investors, jumping into a bear market is a smart strategy that typically results in gains down the road. Although past performance is no indicator of future results, historically speaking, the stock market has always recovered from bear markets and gone on to make new all-time highs.

Although it’s painful to watch your holdings drop by double digit percentages, investing rationally rather than emotionally can result in you picking up shares that are “on sale” and enjoying their ultimate recovery.

Just be sure to invest in the broad indexes or stocks you have personally researched, as not all individual stocks recover from bear markets. For long-term investors, bear markets are where money is actually made, as they end up picking up shares on the cheap.

Bottom Line

Regardless of whether you are a bull or a bear and whether the market is going up or down, always invest based on facts and numbers, research your investments thoroughly and have a plan before you invest. If you need help with financial planning, consult a financial advisor.

John Csiszar contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: Bullish vs. Bearish Investors: Which Are You?