Feral Markets vs Market Correction

Category: Investment Life

You sure have heard or read sometime about bulls and bears in markets. So, let’s talk about the bulls and the bears.

The concept comes, allegedly, on the way the both animals attack. While bulls tend to attack with their horns upwards, bears move their claws on a downward move. Hence, a bull market is a booming market and bull market is a contractive market.

Now, how can you be sure if you are trading either on a bull market or a bear market.

Riding
the bull

When investors show great appetite for securities on long term, and economic performance is a its peak, we say we are on a bullish market.

The simplest way, to measure if you are on the presence of a bullish market, is by comparing the performance of the trend. In another words, when an index shows a 20% growth from a previous low you could say you are on a bullish market.

This could happen on days, weeks or even years. This does not mean that a bullish market is a continuous upwards path. While a rising trend, you could face some speedbumps on the way.

Avoiding
the bear

On the other side of the coin there is the bear. Bearish markets are related to more pessimistic investors. When unemployment is rising, and economic performance get weaker, usually financial markets tend to follow. Although it is not a golden rule.

Contrary to bullish markets, you can witness a bearish market when the value of an index decreases at least 20% from its peak. Those are times for hedging, diversifying and avoiding risks.

Is it a bear or just
a correction?

Defining whether a price drop is the beginning of a bear market is quite risky at the start of the trend. Especially because you could only be on the presence of a market correction.

When the price of a security, or an entire index, falls around 10% on a given period it is considered as a correction. It isn’t uncommon to see a few corrections over the years. They are somewhat normal, and, in some cases, they can be predicted. However, is a complicated task.

A market correction occurs when investors start to feel that the price of a security might be overperforming expectations. This leads to a sell-off and a subsequent price drop.

More experienced, and riskier, investors look to market corrections as a good opportunity to purchase securities. In conclusion, you should pay attention to price variation. Not all falls or rises mean we are on the presence of a trend.

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