Bull and Bear Markets
Stock returns are influenced by a myriad of factors such as valuations, corporate profits, business cycles, monetary policy, and politics. The political influence is not necessarily linked directly to a particular party, however, there is an obvious trend towards a decline in the market, or Bear Market, when our political leadership is progressive or leaning towards socialism policy.
When an extremely high proportion of investors express a bearish (negative) sentiment, some analysts consider it to be a strong signal that a market bottom may be near. This is a reaction based on market sentiment. Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.
Beta shows the performance of an asset relative to the market, i.e. an asset with a beta of 2 will always perform double that of the market (10% market rise = 20% asset rise, 5% market fall = 10% asset fall). The beta is the number that tells the investor how that stock acts compared to all other stocks, or at least in comparison to the stocks that comprise a relevant index.
In general, bigger companies with more predictable earnings and dividends will carry a lower beta value. Bank and insurance stocks, utilities and large conglomerates all tend to have lower betas.
Bull Market
If the market is on the rise, it is generally considered a Bull Market. Many investors are wishing to buy securities while few are willing to sell in the Bull Market.
A bull market is a period of generally rising prices. The start of a bull market is marked by a shift away from widespread pessimism towards hope. It begins as a general perception of the investment community. In this early stage most of the market changes are psychological and may not necessarily be accompanied by strong economic information or Corporate earnings. Then hope becomes "optimism" and eventually euphoria, as the bull runs its course. Once all of the hype has spread then evidence of the impact on the market is visible. Prices of listed securities will begin to rise sharply, and there is a large demand for various trading strategies.
When a nation is experiencing a Bull Market Economy, GDP of the economy is rising and job creation is also on the rise.
Bear Market
If the market is in decline, it is generally considered a Bear Market. When the markets are volatile, some investors get nervous and start to sell.
A bear market is a general decline in the stock market over a period of time. It includes a transition from high investor optimism to widespread investor fear and pessimism. One generally accepted measure of a bear market is a price decline of 20% or more over at least a two-month period. A smaller decline of 10 to 20% is considered a correction. Once a market enters correction or bear market territory, it isn't considered to have exited that territory until a new high is reached.
A bear market is more dangerous to invest in, as many equities lose value. Since it is hard to time a market bottom, most investors withdraw their money from the markets and sit on cash until the trend reverses.
When a nation is experiencing a Bear Market Economy, there is often a recession and and stock prices are plummeting. A lot of "short selling" will take place under such an economy which can further depress economic conditions.
Negative Beta
Negative Beta Coefficient
A beta less than zero, which would indicate an inverse relation to the market, is possible and sometimes in relative terms is known as the negative beta. Cash has a beta of exactly zero. If a stock always falls 10% while the market is rising 10% a company would have a negative beta of one although this is a point of contention among experts whether or not there can truly be a negative beta stock.
An investment strategy might be to hedge your portfolio with some negative beta stocks when the time is right. The key to investing in these unusual stocks is not to draw generalizations based on beta. Instead, you have to look at each stock to determine why the beta is negative, and then decide if it's a good fit for your portfolio.
Gold is considered by many a negative beta stock and a hedge against higher inflation. Gold always seems to have a negative correlation with the stock index. When economic outlook is bearish, people tend to sell their stocks and invest in gold. Gold will not give as good returns as stocks in a bull market. It is possible that psychological perception is a factor in why gold has a negative beta, however, there are other factors including the fact that gold remains a limited commodity meaning there is only so much gold in the world and gold was the original form of currency.
