What is the market of bulls and bears
You, probably, are already familiar with such terms as the bull market and the bear market. To understand exactly what these terms mean, you must first understand how business cycles affect the stock market. “Bulls” are traders who believe that the economy is as good as possible and that the stock market will grow. In other words, the bulls are confident that the economy is booming. “Bears” are traders who believe that things in the economy are as bad as possible and the stock market will either stagnate or decline. The bull market is a market in which the value of the majority of stocks rises, and the market for bears is a market in which the value of most stocks decreases. The Bears are confident that the economy is either already in a state of recession, or is moving in its direction.
Regardless of who is right in each particular situation - “bulls” or “bears” - you, as a trader, can earn money in that and in another case. To do this, you do not need much: to determinethe direction in which the market is moving, and then - in accordance with the tendency revealed by you - to buy or sell stocks. In the bears market, traders make money by selling short sales, i.e. enjoy the fact of falling stock prices. A "short" sale means that traders take shares from their brokers and then sell them in the hope of making a profit when the stock price falls.
Even in the bears market, some types of stocks allow traders to earn money. The "oil" shares and shares of REIT are paid higher dividends, and therefore they are more attractive when the rest of the market is falling or does not show any signs of growth. In the market of “bulls” for you, as a grader, it is very important to hold shares at the stage of economic recovery and get rid of them immediately before the market starts to decline. In more detail about tendencies and that they mean, we will talk in chapter 10.
Generally speaking, the markets are divided into sectors. At any given moment in time, some of the sectors are on the rise. Some traders are adherents of the so-called "rotation" of their investments from one sector to another, which can be particularly beneficial in terms of the business cycle that controls the development of the economy.This basic trading strategy is called sector rotation.
The “ideologist” of traders who identify themselves as supporters of rotation by sectors is Sam Stovoll, chief specialist in investment strategies of the tandard & Poor ’rating agency. In 1996, he published his classic work on the rotation by sector, called ector Inveting.
Sam Stovoll has developed a special rotation model by sector, shown in 5.2. As can be seen from this figure, Sam came to the conclusion that market cycles tend to be ahead of business cycles. Markets, as a rule, reach their lower limit before the rest of the economy is completely in recession. On the other hand, the beginning of the market "bulls55can be found even before the rest of the economy goes to the stage of recovery. Markets first reach their peak values and enter the market of "bears"55even before the general economic indicators point to a peak.
You, as a trader, can take advantage of your knowledge and ideas about which sectors will be at certain stages of the market cycle.You should buy shares of those sectors, the probability of increase in prices of shares in which is, in your opinion, the greatest, and quickly sell shares of those sectors, the prices of shares in which, in your opinion, will soon begin to decline.
Initial stage of recovery
You can identify the initial stage of recovery, when the growth of consumer expectations and industrial production begins, while interest rates reach their minimum. In the USA, this scenario was observed during the recent economic cycle, which appeared during the autumn and in the first months of the winter of 2003. Sam Stovall concluded that at the initial stage of recovery, the role of leaders, as a rule, is assumed by the industrial sector, as well as the sector of basic industries and energy.
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