What is a 'Bunny Market'

A bunny market describes a stock market that does not have an obvious direction but instead "hops" up and down.

The naming convention follows the trend of defining market directions by animals, such as bull market for stocks that are rising or are expected to rise and bear market for stocks that are falling or expected to fall. The names reflect the habits of the animals: Bulls buck their horns into the air, signifying rising stocks, whereas bears are seen as vicious, swiping their paws down, signifying plummeting stocks. Bunny markets hop up and down but never stray too far in either direction.

BREAKING DOWN 'Bunny Market'

Bunny markets are typically seen following an economic depression, when the economy is in the later stages of recovering. They are also seen after global disasters such as acts of war that discourage people from taking risks. Investors are wary to put too much faith in any stock and they play it safe.

How should you invest in a bunny market?

In a bunny market, you can't use the same investment tactics you would in a bull or a bear market. Jim Paulsen, chief marketing strategist at Wells Capital Management, offers a few recommendations on how to invest:

  • Invest more in industrial, material, and capital sector stocks and less in consumer-based stocks. This rationale stems from the fact that bunny markets usually emerge in times of economic recovery.
  • All-or-nothing strategies won't work here. Bunny markets require you to use a give-and-take approach, rather than either putting all your money into one promising stock or pulling it out of a plummeting one.
  • Since stocks are far less likely to be under or over market value in a bunny market, you can't expect to strike it rich on a lucky stock. However, this means that the risk is also lower.

Read more about the trends and risks associated with the bunny market of 2016 in Why Jim Paulsen Sees a Bunny Market.

What contributes to the direction of a stock?

The outlook of investors has a great effect on a stock's performance. If investors have largely negative views of a stock, they tend to sell their shares, which only propagates the pessimism surrounding the stock. Similarly, if most investors view a stock as favorable, they're more likely to purchase the stock and its value rises. As more and more investors follow the same trend, their actions influence the stock. A bunny market means that investors are on the defensive, hesitant to make a dramatic purchase or sale.

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