BULL VS. BEAR
Prolonged asset price declines are called a Bear Market, whereas the continuous increase in price is known as a Bull Market.
Besides higher prices, bull markets are characterized by extreme euphoria and often punctuated by an intense spike in price known as a “blow-off top”.
Meanwhile, bear markets only reach their final conclusion when market sentiment is dominated by pessimism.
In the 18th century, Baron Rothschild, a member of the cunning Rothschild banking dynasty, made the statement:
“Buy when there is blood in the streets.”
This infamous quote suggests the best time to buy is when everyone is reeling from a bear market and extreme pessimism has taken over investor psychology.
However, knowing that exact time is less obvious and trying to time the bottom of a bear market is frequently said to be like “trying to catch a falling knife.”
The psychological impulse to “buy low” attracts speculators at various stages of the bear market cycle and can provide a temporary boost to asset prices.
This short-term improvement is known as a bear market rally or bear market bounce.
I described this type of “relief rally” before (click HERE to read my previous post).
However, “buying the dip” during a bear market can be a painful lesson as the additional declines that can follow are often worse than those which preceded it.
So much of the data investors and economists use to assess current market conditions are backward looking and therefore lead to poorly timed investments.
This is not only true of bear markets, but also true as new bull markets take hold.
Currently the data is extremely contradictory between growth and contraction, thus a war is being waged between bulls and bears.
If the current stock market rally proves to only be a bear market bounce it will be one of the largest ever – of the 48 bear market rallies since 1950 only 5 have been bigger than the one currently underway.
This is either the start of the next bull market or we can expect to see a lot more blood in the streets.
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