THE SOUTH AFRICAN INDEX INVESTOR
“Greater rewards, lower costs”
Bull and Bear Stock Markets
Both bull and bear markets are inevitable. Many smart investors try to anticipate these events – to be out of the market during the bear phase and in the market when the bull market starts - but both are very difficult to time correctly. For example, when a bear market ends, a strong upward move in prices can occur in a very short time. If you are out of the market by then, you will miss the majority of the gains that will transpire during the bull market phase.
Usually, a bear market precedes a recession, where the market starts to discount a future slowdown in the economy by analysing economic indicators such as:
· Decreasing plant utilisation.
· Decreasing steel output.
· Decreasing motor and home sales.
· Increasing unemployment.
· Increasing inflation or interest rates.
Bear markets may start with some sort of a crash – a major drop within a few days when investors least expect it. Some good market indicators that a bear market is lurking around the corner are:
· Investors become more and more optimistic as stock prices continue to increase, even if professionals are becoming wary that prices cannot go up much further.
· Speculative new stock issues are flooding the market.
· Business indicators, such as production plant utilisation, employment figures, and fixed investment are booming.
· Low dividend yields (2% and less) and high P/E ratios (20 plus).
· Inflation and Interest rates are starting to increase.
The start of bull markets are probably more difficult to determine than the start of a bear market. Investors often do not realise they are in a bull market until the market has been going up for some time. Nonetheless, some good indicators of an early bull market are:
· Many stocks have low P/Es (less than 10) and high dividend yields (5% plus).
· The investment public and even market experts are pessimistic about the outlook for the stock market.
· Stock prices do not drop on bad news – an indication that the market is close to its low.
· The market recently experienced a major decline.