Bulls tend to thrust their horned heads upward when attacking, hence the symbolism for a stock market on the rise. Bull markets are cyclical, with four phases. Sometimes the characteristics of these phases make them easy to identify; however, as the market moves through its life cycle, the differences can become less distinct. Historically, bull markets have lasted just under 40 months, according to trader Aubrae DeBuse.
Bull Market Phases
The man Money magazine called the 20th century's "Greatest Stock Picker," Sir John Templeman, said bull markets experience pessimism, skepticism, optimism and euphoria. Another investment professional, Laszlo Birinyi, founded the Birinyi Associates money management firm on the premise that an understanding of market history and how investors think offers a successful way to select stocks and time purchases. Birinyi identifies four phases in bull markets that reflect investor attitude and mirror Templeman's thoughts: Reluctance, digestion, acceptance and exuberance.
Market disillusionment characterizes phase one of a bull market, according to Futures Magazine. This "reluctance" phase follows a bear, or falling, market in which many sold their holdings to cut their losses. The general public has little confidence in the market even though average prices and price/earnings ratios are typically low. Institutional investors start to accumulate holdings to take advantage of the low prices.
Individual investors begin to return in the second phase of the bull market. Institutional trader, Ali Meshkati, notes that, as they recognize the potential for a bull market to develop, investors study stocks in earnest once again. Stock prices, having increased for several months, attract more interest. In this second stage, investors add to their portfolios, which pushes prices higher. Rising prices create demand and greed sets in.
Chris Johnson writes in his Winning Edge investment newsletter that the acceptance phase is the most powerful bull market. Stock prices soar as new investors enter the market. IPOs become popular to take advantage of growing public interest in investments, while the number of corporate mergers and acquisitions, fed by the availability of capital, increases. Media coverage gives investors pointers on how to profit from market activity. Institutional investors sell the shares they bought in phase one, then move into technology and other more speculative stocks. Mutual funds benefit from investors shunning cash vehicles such as money market funds, a reflection of confidence in sustained market growth.
The "exuberance" phase is a period of volatility, high trading volume and high expectations. Investors in this stage of a bull market become speculators who ignore fundamental performance measurements when choosing stocks. An overriding feeling that the market will continue to flourish prevails. However, the market eventually becomes crowded, leaving fewer new investors. The flow of dollars sustaining market performance begins to trickle and top-performing stocks start to drop. The bubble of this final stage bursts as investors realize the market has outpriced itself.
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