Breakout

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Investing 101: Anatomy of a Bull Market

Breakout

This weekend marked the four year anniversary of the 2009 market lows, and it comes just days after the Dow Jones Industrials hit new all-time highs. So it seems fitting to assess this historic move and put it into context.

For this edition of Investing 101, we will grab the bull by the horns, and analyze these most lucrative periods of rising stocks that are typically referred to as bull markets.

What exactly is a bull market?

According to Investopedia, "Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue." It's a term that can be applied to any type of securities trading but, the site says, it is most often used to describe the stock market, and is the metaphoric antonym to the term bear market.

How long do bull markets last?

That depends. According to the Stock Traders Almanac the longest bull market we've had since 1900 lasted 2,836 days and ran from October 1990 to July 1998, wracking up a whopping 295% gain for the Dow Jones Industrials along the way. The Almanac says that the shortest bull market in the past 100 years lasted just 61 days during the summer of 1932 yet still saw the Dow bounce 94%! Those are of course the extremes, but the average bull market of the past century has lasted 755 days and delivered an 85% gain. The current bull run is now four years old and up about 120%, making it significantly above average by both measures.

How do bull markets start and end?

"Bear markets begin at the end of one bull market and end at the start of the next bull market," the Stock Trader Almanac states, implying that a cycle change occurs any time the market retreats 20% or more. While bear markets must eclipse this 20% threshold to exist, bull markets have no such requirement, besides the fact that they reside in between these periods of sharp retreat.

Can there ever be a 'bull within a bear' or vice versa?

In short, the answer is yes. These shorter term, more customary bull and bear cyclical moves often happen within a much larger and longer secular trend. In fact, there is a debate amongst professionals right now over whether the four-year rally we are presently in is the start of a new mega-uptrend or just a really nice bounce within a much longer slump that began with the bursting of the dot-com bubble 13 years ago. Josh Brown of the Reformed Broker blog recently pointed that "the last secular bear market, from 1966 to 1982" saw investors reap virtually no gains for 16 years. Of course that preceded an enormous 18 year run-up that saw the S&P 500 topping in March of 2000 at levels it still hasn't meaningfully eclipsed today. Should the S&P 500 breakout to new highs then investors will likely acknowledge that a new secular bull market began in March of 2009. Should it falter from it, then the secular bear crowd will need further proof that our downtrend doesn't have further to go.

How did bull and bear markets get their names?

Investopedia says it "comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down."

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