Understanding a Bull Market Can Help You Be Bear-Market Ready

Is singer Miley Cyrus a stock-market genius? On March 5, 2009, merely days before the start of an astonishing bull market, she released the hit song, "The Climb," for Hannah Montana: The Movie. You might have skipped the film, but it's been hard to miss the bull market as it continues its march into its ninth year.

Since the start of the current bull market, the S&P 500 benchmark has returned more than 250 per cent. With valuations, global economic growth and corporate profits all continuing to trend upward, will this bull market keep on running, horns up? No one has the definitive answer, of course, but as the saying goes: what goes up must come down. If you started investing in the last eight years or so, it might be hard to get your head around anything but a market generally trending higher. But understanding the ins and outs of a bull market can help you determine just how a change in market sentiment to bear territory could affect your portfolio and investment choices.

Just what is a bull market? Generally, to qualify as a bull market, prices must increase at least 20 per cent in an index such as the S&P 500, widely considered the top gauge of the performance of large-cap U.S. equities, or the closely followed Dow Jones Industrial Average, which includes 30 industry-leading blue-chip stocks. The start of a bull market is marked not by how long prices have risen, but rather by the magnitude of the rise. When investor confidence is high it can boost valuations for an asset class, like stocks or bonds. Prices continue to rise because there are more buyers than sellers.

What's the deal with the bull and bear references? Bull is in reference to the way bulls attack, horns up. Optimism is high in a bull market, usually coinciding with the expansion and peak of an economic cycle when companies are continually investing and growing their revenues. It's not hard to see evidence of optimism amid the stock-price rises over the past eight-plus-years. Bears, on the other hand, attack by drawing their paws downward. Thus the "bear" reference applies when markets have fallen by at least 20 per cent.

What's it mean to be "bullish"? It's being optimistic that asset prices will continue to rise for the foreseeable future. Investors "go long" when they are bullish, which in the case of a stock means they'd be buying because they believe its value will rise.

What's the record length of a bull market? The longest bull market in modern times lasted from the fall of 1990 to the early spring of 2000, or about 113 months. It returned around 400 per cent before ending with the dot-com collapse.

Can there be down periods in a bull market? Yes. A bull market can still have down market days or months, but the overall trend remains up. That includes enduring corrections, when stock prices drop at least 10 per cent. 

How does a bull market typically end? Well, that's a tricky one. No one knows for sure. Triggers that may turn a bull market to a bear could include a recession, or the belief that one is imminent, or a significant jump in interest rates. When weak sentiment starts to replace optimism, lower demand can pinch asset valuations. One indicator some market watchers keep on their radar is known as the VIX, or the Chicago Board Options Exchange Volatility Index. It's an index of expected future volatility as implied by prices for options contracts and is considered a gauge of market anxiety levels.

What sector has outperformed in the current bull market? In a bull market, cyclical sectors, like consumer discretionary, financials, and industrials typically tend to do well. Among the best-performing sectors so far is consumer discretionary, which includes non-essential items that consumers buy when they're feeling optimistic and well-off. These include clothing, cars, travel and entertainment. But it's important to remember that in any type of market, past performance is no guarantee of what will happen in the future. Outside of specific sectors, index-linked investments are designed to closely track the performance of a specific market index, which can mean moving higher or lower in tandem with an overall index.