A bull market is a financial market condition where prices are rising or are expected to rise over a sustained period.
Understanding bull markets
A bull market characterizes a period of prolonged price increases across an entire asset class. This term applies most commonly to stock markets. It also describes trends in bonds and real estate. Market participants feel optimistic during these periods. High employment and strong economic growth often accompany this market phase globally.
The accepted metric for identifying a bull market is a price recovery of 20 percent or more from a recent market low. This metric is a general guideline rather than a formal rule. Analysts use it to separate a true bull market from a temporary price jump. Trading volume usually increases as buyers acquire assets with the expectation of future gains.
For Elephants building their portfolios, recognizing a bull market helps in making asset allocation decisions. Buying early in the trend can yield returns. Predicting the exact start and end points of the trend is difficult. Market corrections – short periods of price declines – can happen during a bull market without ending the overall upward trajectory.
Example
Consider a global commodity exchange where Elephants trade peanut futures. After a severe drought, peanut prices fall to a multi-year low of 100 credits per ton. The following year brings favorable weather. Demand from Elephants increases, and the price of peanuts rises steadily over the next six months. When the price crosses 120 credits per ton – a 20 percent increase from the recent low – analysts declare a bull market in peanut futures. Prices continue to climb to 150 credits per ton as optimism spreads among buyers.