Investors are called bullish when they are optimistic about how the stock market is likely to perform, while bearish investors are pessimistic. Traders who employ short-term strategies such as day trading or options trading also use the term bullish to refer to how an investor thinks the price of a particular stock will behave or to the direction of a price movement.
The term “bullish” refers to a belief that stock prices are going up and will continue to do so for some time. Investors tend to be bullish during a bull market. Bull markets are more than just a few trading sessions in which well-known stock indexes such as the Dow Jones Industrial Average or Standard & Poor’s 500 show gains. A bull market is characterized by a sustained upward trend that may last for years. By contrast, a bear market is one in which prices fall over a long period. Investors who believe the market will continue downward are referred to as bearish.
A bull market tends to be associated with strong economic growth and employment. Investors see that companies are reporting good earnings and growth, so they start buying. The demand for shares increases. The more bullish investors become, the more they bid up stock prices. The rising prices lead to higher returns, fueling further investor optimism that the bull market will continue. Bull markets are the periods when most investors make money. That is particularly true for those who become bullish in the early stages of a rising market but who keep their heads and sell when the bull market reaches its peak and starts to turn bearish.
Some investors buy and sell stocks for the short term. For example, day traders and options traders rely on charts, mathematical formulas and other forms of technical analysis to evaluate and hopefully anticipate short-term price movements. To the short-term trader, the terms bullish or bearish describe the direction of a price movement, rather than a long-term trend in share value.
Bullish Trading Example
To illustrate the difference in usage of the term bullish among long-term and short-term investors, let’s suppose a day trader is watching a particular stock’s price movements. He sees the stock price approach a low figure several times and then go back up. The day trader refers to the upward price movements, which may last for only a few minutes, as “bullish reversals.” He doesn’t mean he is bullish on the stock. In fact, in this case, he is watching the stock hovering close to the low price, called a price support. He may be waiting for the stock to break through the price support and make a large downward move before buying shares.
- Hemera Technologies/Photos.com/Getty Images