When you flip a coin, the occurrence of a coin toss is based solely on chance and is therefore unpredictable. If you continue to flip a coin 100 times, there may be successive heads or tails. Now relate this to the short-term movement of the stock market, such as the downward movement towards the stacks and the upward movement towards the heads.
The movement of the stock market cannot be predicted accurately, in the short term, much like the case of a coin flip when a coin is flipped. However, in the long term, when a series of upward or downward movements follow each other, a trend can be observed, and this is called a bear market or a bull market.
A bull market is a term given to a stock market situation when it is rising or expected to rise. It is generally said that as markets rise over time, without falling more than 20% from their previous 52-week peak, they are considered a bull market. Similarly, the term bear market applies to the state of the market when it is expected to fall, or to fall overall 20% from its peak.
Extrapolating to the current market situation, the Nifty 50; Nifty Midcap 150 and Nifty Small cap 250 are down 14.5%, 17.7% and 18.0%, respectively, from their October 2021 high to their May 2022 low. This indicates that Indian markets are not still in a bear market. Market experts, on the other hand, believe that given the current geopolitical environment and macroeconomic factors, we could see a further decline.
During a bull market, security prices continue to rise. In this phase of rising share prices, investors believe
that the uptrend will continue for an extended period. Typically, the country’s economy is seen to be strong and employment levels are high during this phase of the market.
In a downswing, prices fall, and everything goes down, causing a downtrend. Investors believe this trend will continue and prolong the downward spiral. In this phase, there is a slowdown and an increase in unemployment levels.
Wondering why these phases are called “bull phase” and “bear phase”? There are several stories about the origins of these names. One of the most common reasons for this naming convention is how ferociously these two animals attack. A bull charges forward, raising its horns in the air and a bear will use its claw to grab and pull its victim down. This movement is metaphorically the characteristic of the state of the market. If it goes up, it is considered an advancing market and when it goes down, it is a downward market.
What drives a bull and bear market? A bull and bear market phase occurs due to various economic factors. Historically, we see that the two phases follow one another, alternately.
In Chart 1 below, the factors that led to the bull and bear phases over the past 22 years from January 2000 to May 2022 have been highlighted. During the period, on a few occasions, the markets were stable. At the beginning of the period from January 2000 to May 2003 and then from September 2010 to September 2013, the markets showed no trend. It is observed that the bullish phases last longer than the bearish phases, on a long-term trend. Over 22 years, there have been five uptrends versus three downtrends.
Chart 1: Bullish and bearish phases on Nifty 50
Based on macro factors, let’s explore the differences between bull and bear market phase below:
Yet, sometimes markets can behave differently from larger trends. This is observed when we invest in direct stocks while choosing a stock. In a downtrend, there could be signs of bullish phases and vice versa.
What strategies can work in a bull or bear market
The ideal investment mantra is to buy low and sell high. This means that you should generally buy in a bear market and sell in a bull market; however, we typically see investors flocking to the stock markets during a bull run and may only exit during the next bull run to profit from their investments. Most of the time, investors lose confidence and exit the bear market itself with losses. But there is a caveat involved; picking a stock based solely on its price during a downturn, without checking company fundamentals, can be misleading.
When buying in a bear market, you need to understand if you are catching a knife or a mango. This means always looking at fundamentally sound companies when buying a stock in a bear market, otherwise you might end up catching a stock that looks more like a falling knife (example: Kingfisher Airlines).
The Kingfisher Airlines stock (Chart 2) in 2006 was at INR 76 and later in 2007 it peaked at INR 300+ only to drop drastically and never recover. Ultimately, an investor would have lost all of their money because the stock was delisted on May 30, 2018. This is a classic example of a risky proposition that resulted in a permanent loss because fundamental details of the business were ignored when investing in it. Ideally, an investor should have checked whether or not there was value in the stock before buying.
Graph 2: Price evolution of Kingfisher Airlines
On the other hand, if you had considered buying ICICI Bank, which was a fundamentally sound company, it would have delivered strong returns. The price of ICICI bank (Chart 3) in December 2019 touched INR 549.4, then it fell to INR 284 in March 2020, but gradually increased again to INR 674 in February 2021 and rose again to reaching INR 841.7 in October 2021. Later it slipped in March 2022 to INR 653.8 and again gradually increased to INR 747 in April 2022.
Overall, if you notice, ICICI Bank’s stock value has steadily risen to stay in the 500+ level year-on-year range due to its strong fundamentals. So, this is the fruit you got for grabbing the chance if you bought it in 2017.
Chart 3: ICICI Bank price movement
Predicting the markets for investment purposes is a difficult task for anyone, including market veterans. Thus, to make the most of the two phases, investors can invest gradually in a calibrated way that does not cause them to suffer large losses. If someone had started an INR 10,000 SIP in one of the oldest equity mutual funds, HDFC Flexi Cap Fund, in December 1999 and continued to invest even during the bears of 2008, 2014, 2015 and 2020, the investment value would have reached INR 334 lakh as of May 31, 2022, compared to INR 141 lakh in Nifty 50 (as shown in Chart 4).
Indeed, the value has appreciated due to the function of averaging costs in rupees over the long term. In SIP mode, regardless of market conditions, an investment of INR 10,000 was made monthly and a number of units were purchased. These enjoyed over the years. This is because during bearish periods, more units were bought and during bullish periods, the value increased.
Chart 4: INR 10,000 monthly SIP in HDFC Flexi Cap vs Nifty 50
Therefore, when investing, don’t worry about what phase you are investing in, as long as you are investing for the long term. This should be your main goal. Markets go up and down and ups and downs occur; how you maneuver the journey will determine whether you come out a winner or a loser.