What Is a Bull?
A bull is an investor who thinks the market, a specific security, or an industry is poised to rise. Investors who adopt a bull approach purchase securities under the assumption that they can sell them later at a higher price.
Bulls are optimistic investors who are attempting to profit from the upward movement of stocks, with certain strategies suited to that theory.
- A bull believes that the market will increase in value over time.
- Bears are the opposite of bulls; they believe that the general direction of prices in the market trends toward a decline.
- A bullish investor can fall prey to a bull trap, when they believe a sudden increase in the value of a particular security is the beginning of a trend, resulting in the investor going long.
- Some of the more common bullish patterns used by traders and investors include the Cup and Handle, Bull Flag, Bull Pennant, and Ascending Triangle.
Market Mentalities: Bulls Vs. Bears
Bullish investors identify securities that are likely to increase in value and direct available funds toward those investments.
Opportunities to assume the position of a bull investor exist even when an overall market or sector is in a bearish trend. Bull investors look for growth opportunities within the down market and may look to capitalize should market conditions reverse.
Characteristics of a bull market include:
- A prolonged period of rising stock prices (usually by at least 20% or more over a minimum of two months)
- A strong or strengthening economy
- High investor confidence
- High investor optimism
- A general expectation that things will be positive for an extended period
Bulls and Risk Mitigation
To limit the risk of losses, a bull may employ the use of stop-loss orders.
This allows the investor to specify a price at which to sell the associated security should prices begin to move downward. Additionally, these investors may purchase puts to help compensate for any risk present in a portfolio.
Bulls can also use diversification to mitigate risk. By spreading investments across different asset classes, sectors, styles, and geographic regions, investors can still remain bullish without putting too many eggs in one basket.
Bull investors must be mindful of what is commonly known as bull traps.
A bull trap exists when an investor believes a sudden increase in the value of a particular security is the beginning of a trend resulting in the investor going long. This can lead to a buying frenzy where, as more investors purchase the security, the price continues to inflate. Once those interested in purchasing the security have completed the trades, demand may decline and lower associated security prices.
As the price declines, bull investors must choose whether to hold or sell the security.
If investors begin to sell, the price may experience further decline. This may prompt a new round of investors to sell their holdings and drive the price down even further. In cases where a bull trap existed, the associated stock price often does not recover.
Bull vs. Bear
A bear is the opposite of a bull. Bear investors believe that the value of a specific security or industry is likely to decline in the future. A bear market occurs when the market experiences prolong price declines—typically when securities prices fall by 20% or more and there is negative investor sentiment.
If you are bullish on the S&P 500, you attempt to profit from a rise in the index by going long. Bears, however, are pessimistic and believe that a particular security, commodity, or entity is set to suffer a decline in price.
Bullishness and bearishness do not necessarily apply only to the stock market. People can be bullish or bearish on any investment opportunity, including real estate and commodities, such as soybeans, crude oil, or even peanuts.
Examples of a Bull
Unfortunately, the Nasdaq crashed nearly 80% over the following several months, essentially giving back all of the gains made during the bull run.
Another famous example of a bull market was the extreme run-up in U.S. housing prices in the mid-2000s. It was fueled by easy-money policies, relaxed lending standards, rampant speculation, unregulated derivatives, and irrational exuberance.
The housing bubble was directly related to and possibly the root cause of the 2007–2008 financial crisis.
Always be on the lookout for early signs that a bull run may be coming to an end. For instance, U.S. homeownership had peaked at 69.2% in 2004. And in 2006, home prices began to fall. Yet the risks only became apparent to most investors in August 2007.
How Do I find Bullish Stocks?
Bullish stocks are typically defined as stocks that display a bullish price pattern. In order to identify bullish stocks, there's no substitute for learning the ins and outs of technical analysis.
Of course, traders should also familiarize themselves with technical indicators such as overlays and oscillators.
What Is a Bullish Pattern in a Stock Chart?
Some of the more common bullish patterns used by traders and investors include:
- Cup and handle: This pattern resembles a cup with a handle, where the cup is in a "U" shape and the handle has a slight downward drift.
- Bullish flag: This pattern resembles a flag on a pole, where the pole represents a sharp rise in the stock and the flag comes from a period of consolidation.
- Bull pennant: This is a bullish continuation pattern where the flagpole is formed by a big move in the stock and the pennant is a consolidation period with converging trend lines.
- Ascending triangle: This continuation pattern is formed by trend lines that run along at least two swing highs and two swing lows.
What Are Some Bullish and Bearish Indicators?
Four of the most commonly used technical analysis indicators are:
- Moving averages: If the moving average line is angled up (down), a bullish (bearish) trend is occurring.
- Moving average convergence divergence (MACD): If the MACD lines are above (below) zero for a prolonged period of time, the stock is in a bullish (bearish) trend.
- Relative strength index (RSI): When the histogram reading is above 70, the stock can be viewed as "overbought" and due for a correction. When it is below 30, it can be viewed as "oversold" and ready to bounce back.
- On-balance-volume (OBV): OBV is a tool used to confirm trends; a price that's rising should be accompanied by increasing OBV and a falling price should be accompanied by declining OBV.
What Is a Bullish Reversal?
A bullish reversal is a pattern that represents a price decline, followed by a rebound. Common types of bullish reversal patterns include:
- Double bottom: Pattern that looks like a "W" which describes a price decline, rebound, yet another price decline, and another final rebound.
- Inverse head and shoulders: As the complete opposite of a "head and shoulders bottom," the inverse head and shoulders pattern is characterized by a series of three bottoms, with the second one being the biggest.