Bull Markets and Bear Markets

Bull Markets and Bear Markets

Posted on August 02, 2021
For this week’s market update, we are going to briefly examine how we identify market characteristics.  In the news, we often hear the terms “bulls and bears.” 

Fun Fact: Do you know why they call them bull markets and bear markets?  Imagine you’re a matador in the ring with a bull.  When the bull goes to charge, how will it attack? —by hitting upward.

via GIPHY


Now, pretend you’re walking in the woods, and you encounter a bear.  How will the bear attack you? —by swinging downward.

via GIPHY


When we think about bull markets and bear markets, our first thoughts often go to upward and downward trending markets, but that isn’t necessarily the case.  Bull markets and bear markets should not be thought of as a metric of direction, but rather as a measure of risk.

Canterbury uses a series of technical indicators and volatility to identify whether a traded security is in a bull market, a bear market, or somewhere in between.  In other words, there is no hard line in the sand that states “a bear market is defined by a 20% drop.”  Here are some basic characteristics of bull and bear markets:

Bull markets have low volatility, and therefore low risk.  In other words, the security or market fluctuates in a normal, stable manner.  Bull markets are often upward trending and “boring” –there are very few large “outlier” trading days.

Bear markets have high or increasing volatility.  There will be large daily fluctuations, both up and down.  Have you ever heard the old saying “if you miss the 10 largest up-days in the markets, you’re screwed?”  Well, did you know that the 10 largest up-days often happen in the same time period, and sometimes in the same week, as the 10-largest market down days?  Bottom line, bear markets are volatile and irrational.

Transitional markets as stated in the name, fall somewhere in between a bull and a bear market.  A transitional market has rising or falling risk, depending on where the security is coming from.  A transitional market environment could occur after you see a volatility spike in a security from a bull market, or as volatility begins to cool off coming out a volatile bear market.  Transitional markets often give us an “alert” that characteristics in a security may be changing.
Market environments, bull or bear, are a measure of risk, not return.  Not all securities in a bull market go up substantially and put in several new highs, but most securities that put in new highs have bull market characteristics.  On the other hand, a security that is in a bear market environment may not continue to drop by -50%, but all securities that do drop by -50%+ have bear market characteristics.

Sector Rankings
Looking at the individual S&P 500 sectors, we can place each of the index’s 505 stocks as being either bullish, transitional, or bearish.  The chart below shows the current breakdown of each S&P sectors percentage of stocks in a bullish, transitional, or bearish environment:



Source: CIM, as of 7/30/2021

From the chart above, you can see that Health Care currently has the largest percentage of bullish stocks.  Real Estate is also quite strong, with no bearish stocks. Energy and Financials have a high percentage of riskier securities, with most being either transitional or bearish. Overall, there is a high percentage of bullish stocks across the US sectors.

If we rank the sector movements on a risk adjusted basis, and compare it to the chart above, they correlate well. Health care, which has the highest percentage of bullish stocks is ranked first, with Real Estate in second. Energy is in last:



Source: CIM, as of 7/30/2021

Bottom Line
Currently, the broad markets are in bullish market states, particularly when it comes to large cap securities (which is what the S&P 500 and its sectors are). That does not mean that the markets will continue to move higher, but it does mean that it has many of the right characteristics in place. At Canterbury, we measure market and security environments every day. 

It is difficult to make predictions, particularly about the future (Mark Twain).  Forecasting markets is no different.  That is why we need to evaluate what environment a market or security is in today and monitor for any daily changes. 

Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.