What It Is:
The opposite of a bear market, a bull market is a period of several months or years during which securities prices consistently rise. The term is usually used in reference to the stock market, but it can describe specific sectors such as real estate, bond, or foreign exchange.
 
The bull market of the 1990s is perhaps one of the most famous and longest bull markets in history.
 
How It Works/Example:
Identifying and measuring bull markets is both art and science. One common measure says that a bull market exists when at least 80% of all stock prices rise over an extended period. Another measure says that a bull market exists if market indices rise at least 15%. Of course, different market sectors may experience bull markets at different times.
 
The causes and characteristics of bull markets vary, but most financial theorists agree that economic cycles and investor sentiment both play a role in the creation and momentum of bull markets. In general, a strong or strengthening economy, indicated by high employment, high disposable income, and high business profits usually ushers in a bull market. The existence of several new trading highs for well-known companies also indicates a bull market is occurring. It is important to note that government involvement affects bull markets. Changing the federal funds rate or tax rates can encourage economic expansion or contraction.
 
Rising investor confidence also indicates a bull market, and it is perhaps more powerful than any economic indicator. When investors believe something is going to happen (a bull market, for example), they tend to take action (purchasing shares in order to profit from expected price increases) that actually turn expectations into reality. Although it is an difficult concept to quantify, investor sentiment shows through in mathematical measurements such as the put/call ratio, the advance/decline line, IPO activity, and the amount of outstanding margin debt.
 
Regardless of their exact beginnings and ends, bull markets typically have four phases. In the first phase, prices are low, investor sentiment is low, and investors are pessimistic about future prices. In the second phase, stock prices begin to increase, trading activity and corporate earnings increase, and economic indicators are above average. Investor sentiment also gets more optimistic. In the third phase, market indexes and many securities reach new trading highs, trading activity continues to increase, and dividend yields reach historic lows. In the fourth and final phase, there is excessive IPO activity, trading activity, and speculation. Stock P/E ratios are also at historic highs. As investors take profits or react to bad news or negative indicators, bull markets generally unravel.
 
Why It Matters:
Bull markets usually present a multitude of moneymaking opportunities for investors because prices are generally rising across the board. But bull markets don’t last forever, and they don’t always give advance notice of their arrival, so the investor must know when to buy and when to sell to maximize his or her profits. This means the investor must attempt to time the market, or gauge when a bull market has begun and when it is ending.
 
Analysts spend thousands of hours trying to mathematically determine what will trigger the next bull market and how long it will last. Technical analysis is especially prevalent in this effort, although less sophisticated indicators such as hemline fashions or the NFL division of the last Super Bowl winner also provide fodder for such predictions.

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