The terms “bearish” and “bullish” are words that you will definitely encounter at least once during your investing journey. It is used to describe the market sentiment during a certain trend in the currency, commodity, or stock markets.
But before defining the terms bearish and bullish, let’s first determine what a Market Sentiment is.
What is Market Sentiment?
The overall attitude that investors have towards a particular market is known as the market sentiment. This is the feeling or tone of the whole market or the way the majority thinks. It can be mostly seen through the activity and price movement of the securities traded in the market.
It is also sometimes referred to as “investor sentiment” and is not based on fundamentals all the time. If you’re a day trader and/or a technical analyst, you will most likely be familiar with the market sentiment which affects the short-term price changes that are often due to the attitude of the majority of investors towards a certain security. As a contrarian investor, you would also be watching the market sentiment to make sure that you do the exact opposite of the prevailing sentiment.
This is where the terms bearish and bullish comes in. As was aforementioned, the two words are meant to generally describe the market sentiment, when the stocks are going down or up.
The market is mostly driven by emotions which makes it rather different from fundamental value. This is because market sentiment is mostly based off of feelings and emotions, while fundamental value pertains to business performance.
Now let’s turn to the two opposite terms.
Bearish
When a market is described as bullish, its means that a stock price is predicted to fall by the investors. This basically means that investors are pessimistic, thinking that things are going to get worse and therefore enters the market with a sell. This tends to happen when the market sentiment is very low, which is usually compelled by negative economic data and low employment rates. In a bull market, the snowball effect is prominent – negative feelings triggered by an event can end up in a long term downward trend.
Bullish
A bullish market usually happens when economic indicators points that things are looking up. This happens when investors are being optimistic. When investors believe that a stock price will increase as time pass by it will be considered bullish. Those who buy calls are bullish on the underlying stock, meaning that they believe the stock price will rise eventually. They then paid for the right to purchase the stock during a certain time that is known as the exercise price or strike price.
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