Bull and bear markets are traditional economic indicators, where investors can enhance their investment strategies, understand market movements, and avoid market wide noise such as News and pessimistic market sentiment. first of all, we need to understand that most of the asset prices appreciate when there is a bull market whereas most of the asset prices fall in a bear market. bull and bear markets each has three phases a total of six. At the beginning of Phase I of a bull market assets prices are getting very attractive, value investors start to enter the market and buy assets that are undervalued. However, most of the market participants still yet to realise that the economic is recovering and think that the market sentiment is still pessimistic. Take the 9.11 and SARS as examples. in 2003~2004, the global stock markets bottomed out and Hong Kong Hang Seng Index eventually rose from 8,300 points to 32,000 points In phase II, the market has already accumulated a certain amount of increase but since the investors still remember the market crash freshly therefore even a slight correction could lead to a very pessimistic market sentiment. Due to heavy selling pressure, the market has a significant correction and the adjustment could reach to 40%~70% of the accumulated growth However the difference between this Phase and the bear market is the falling of the stock price. in Phase II of the bull market is only due to the pessimistic market sentiment while this is actually profited example is what happened in 2004~2005, the US was entering into an interest rate cycle and China had implemented s serious of macro -control policies to prevent the economic from being overheated. these measures are in the long run good for the economics development however the Hong Kong Hang Seng Index still evaporated half of its accumulated increase right after. the continuous rise of assets prices and forget the memories and the feeling of the crashes. therefore they keep on buying regardless the prices inflated to a situation that almost can be called insanity, just like the year 2000 and 2007 in 2007 global housing market were inflating insanely while in Asia markets had rumors that China will finally pump money to Hong Kong, so-called the Hong Kong direct train, it hadn’t even started yet, the market has already accumulated quite a lot of increase, the Hong Kong Hang Seng Index has risen from 19000 points to 30000 points, while the US S&P 5oo rose from a staggering 15 percent in just one month and a half.
It's in phase III where you can hear people talking about stocks everywhere, in their lunchtime, teatime, on their way to work, there are posts on the forum saying they were going to quit their jobs and focus on stock markets only. People seem to forget that the US Subprime Crisis had started evolving as early as 2006~2007, even the US FED implemented a rate cut to save the housing market, the investors still considered it as a positive news and eventually led to the bubble to burst.
There are 3 phases in the bear market as well, just that the situations in these three phases are completely opposite, in phase I, investors couldn’t sense the clues that the market is down trending while value investors start to sell off their assets; in phase II, there’s a sharp rebound in the market and investors only consider it as a correction to be part of the bull market, they still have optimistic views and confidence on the market.
therefore whenever there is a rebound they enter the market again. In fact, it is contrary to phase II of the bull market, the business stop making profits and even losing money. Therefore, when it comes to the phase III of the bear market, investors who hold on to the assets would sell out the assets to recover the debts, market sentiment becomes extremely negative and the assets values seems to reach its lowest price.
But, if winter comes can spring be far behind? When the market is full of bad news it also symbolises that another bull market just about to begin.
The ups and downs of an economic cycle could last for years, the market sentiment would definitely affect the market fluctuation, but if we are able to grasp the trend of the market, the fluctuation would only create opportunities for us to buy or sell.
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