As an investor, it is critically important to understand:

• what bull and bear markets are,
• what causes them,
• how to determine when they are occurring and
• how to profit from them.

A bull market is when prices are in a rising uptrend for a financial investment, such as a stock market index like the S&P 500. That means prices are trending upwards with higher highs and higher lows.

A bear market is when prices are in a falling downtrend for a financial investment. That means prices are trending lower with lower highs and lower lows.

This chart of the S&P 500 shows various bull and bear market periods since 1990...

As you can see, investing would be much easier without bear markets! All you would have to do is identify a rising price trend in an investment and then buy it. You’d never have to worry about serious long-term losses.

Wall Street and most investors seem to pretend that bear markets do not exist, since most financial investments are bought “long,” meaning investors only profit from them when prices rise...not when they fall. Unfortunately, as history proves time and time again, bear markets are very real and can be very hazardous to your wealth.

What causes bull and bear markets?

Ultimately, what causes rising and falling price trends in financial assets is investor psychology. When investors are generally:

• optimistic -- or “bullish” -- about an investment, they buy it, which leads to rising prices.
  
• pessimistic -- or “bearish” -- about an investment, they sell it, which leads to falling prices.
  

This optimism and pessimism can also relate to any number of “fundamental” factors such as the economy, interest rates, government policies, earnings, etc. But in the end, financial prices (as well as all important fundamental factors, such as those just listed) are driven by human behavior, which is driven by human psychology. Financial markets are not mechanistic, so there are no fundamental factors that always lead or coincide with financial prices.

How can an investor determine when a bull or bear market is occurring?

The only reliable way to do so is to look for rising or falling price trends on a price chart. Various technical indicators can help and are discussed in our free Special Report titled “How To Use Technical Analysis To Invest For Bull And Bear Profits,” as well as a our free Webinar titled “How To Use Stock Market Indicators To Invest For Bull And Bear Profits.”

How can an investor profit from a bull market or bear market?

If a bull market uptrend is identified as occurring, an investor can simply “buy long” that investment, such as buying a stock or ETF. If a bear market downtrend is identified as occurring, that is usually not as simple. Let’s say IBM stock is trading at $100 and you have identified it as being in a bear market downtrend and you expect that trend to continue.

The main way to profit is by “selling short,” which means entering a short sell order in a margin account with your broker. The brokerage firm then borrows stock from an IBM shareholder (or their own account) and sells it. If the price subsequently:

• falls BELOW the price at which you sold it short, you can profit by “covering your short,” by buying the stock at the now lower price. The brokerage firm returns those shares to the shareholder (or their own account).
• rises ABOVE the price at which you sold it short, you will incur losses on buying the stock back.

For shorting, most brokerage firms require you to maintain a 50% cash “margin” in your account relative to the value of the stock. If the stock rises by a certain amount, they will ask you to put additional cash into your account to meet the margin requirement. This is called a “margin call."

Generally, we consider short selling of individual stocks to be too risky, since individual stocks can become “crowded shorts” and subject to major “short squeeze” rallies, so we generally only recommend shorting ETFs. However, it is not always possible to borrow shares to short in less-liquid ETFs and you may be required to put more cash into your account to meet margin calls.

So while ETFs can be shorted in the same manner as individual stocks, we generally recommend “short” inverse ETFs that you can buy, just like buying a regular stock, that will go up in price as the underlying investment falls in price. Of course, these ETFs will also fall in price when the underlying investment rises in price, so it’s important to be disciplined in your investment approach and use stop-losses to manage risk.

For a detailed explanation of how to profit from bull and bear markets, please see our free Special Report titled “How To Invest For Bull And Bear Profits."