Bull Market or Bear: Understanding Common Trading Terms and Why They Don’t Matter

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Investing 101

Potter Stewart, the Eisenhower-era Supreme Court Justice, is perhaps best remembered not for his many contributions to jurisprudence but for a single statement in an obscenity case.

The state of Ohio was trying to censor a French film, Les Amants, as hardcore porn.

In a concurring opinion rejecting censorship of the film, Potter wrote, in Jacobellis vs. Ohio: “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.” (Emphasis added.)

It was a commonsense argument for a slippery case, most obviously since what one person might consider “hardcore” another might consider tame, and because our views of such matters clearly have changed with time. You need only spend 10 minutes on the Internet to know that. (Don’t worry, the link is safe…it’s a Forbes story.)

Dow Falls! Panic!

Similarly (and sorry to disappoint if you thought the rest of this column would be X-rated), the notion of a “bull” or “bear” market is tremendously flexible and prone to wide divergences of opinion, depending on the speaker. Everyone seems to know a bull (or bear) market when they see one.

Besides a lack of clear definition, over time we also become desensitized to market shifts. The media has a tendency to present numbers in a way designed to trick us into paying attention. For example, when rising indexes seem to move dramatically (“Dow Falls 240 Points!”), the impact is less dire when expressed in percentage terms (the same news headline could be expressed “DowSlips 2%”).

So what is a bull market? A stock market that is going up faster than “normal” for a relatively lengthy period, usually thought of in terms of months or at least multiple consecutive weeks.

And a bear market? The reverse. Stocks can’t catch a break, falling consistently over some surprising period of time.

Because these definitions are essentially meaningless (“I know it when I see it” meaningless, anyway), traders come up with all kinds of slightly shaded variations of the idea to explain shorter-term trends that seem to conflict with their broader view.

Science Terms, Abused Again

For instance, a bull or bear market acting as one expects — rising or falling consistently — is considered a “secular” trend. The word derives from the Medieval Latin term for temporal, or bound by time, and just means “long term.”

Scientists and economists often use it to describe events with a long, observable history, or time series. And that’s why it’s often used as an antonym for “religious,” which means not bound by time or worldly concerns. God exists, it is thought, “outside of time.” Geology, however, is secular; unemployment stats, too.

What happens, then, when a trader is wrong about a supposed bear market downtrend and stocks go up for a short period? Why, it’s just a “bear market rally,” of course. Everyone else is wrong. Stocks soon will resume their secular trend downward. Nothing to see here.

Another term for this, used derisively, is “sucker’s rally,” suggesting a stock or market that is rising because uninformed buyers are snapping up shares in spite of the obviously bad bear market trend underway.

Similarly, you often hear of the “dead cat bounce,” when a stock or the market rises after falling sharply. Somebody is buying up the shares on the cheap, but they can’t possibly be right, the traders say. Even a dead cat will bounce.

What Really Drives Stocks

The salient point, of course, is that just about nobody can predict with any clarity the future direction of stocks, at least not in a replicable fashion. Over time, yes, there is a bias toward moderate inflation in the economy. That broad, quasi-atmospheric pressure tends to push along capital into higher risk endeavors, some of which will pay out a return, some of which will not.

If you could predict exactly when stocks will correct downward and by how much and then buy only at the temporary bottoms, you’d be immensely rich. It also wouldn’t be a market, which exists to set prices in real time, creating both winners and losers along the way.

This fact alone is reason enough to consider dollar-cost averaging. This is when you buy in equal allotments of investments on a periodic basis in order to capture gains of the market with regularity. In effect, by spending equal dollar amounts you buy more shares when prices are low and fewer when prices are high. It’s a counterintuitive strategy but as research shows, it’s an effective one.

So, Bull or Bear?

Are we in a bull market yet? Is a bear around the corner? You are likely only to know for sure once that stretch of market is well in the past, a distant figure in your rear-view mirror. One thing’s for certain: Your investment performance will be better off if you invest with a solid long-term plan than if you try to outguess the legions of full-time professional guessers.

Don’t believe me? You’ll know it when you see your portfolio.

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