Bull markets = prices climbing consistently while everyone feels invincible. Bear markets = prices dropping relentlessly while panic spreads. Simple definitions. Reality’s messier.
Official rule: 20% gain from recent lows triggers bull status. 20% drop from recent highs confirms bear territory.
What Actually Happens During Each Phase
Bull markets breed overconfidence. Stock prices soaring creates amnesia—nobody remembers crashes exist. That tech stock at 50x earnings? “Growth is coming!” becomes the mantra. Fundamentals? Ignored completely. Retail traders quit their jobs thinking daily profits will continue forever.
The 2003-2007 bull run convinced people real estate only goes up. Banks lent to anyone breathing. March 2020’s crash bottomed fast—within months, markets ripped 40% higher creating FOMO everywhere.
Bear markets breed absolute terror. Stocks down 35% on average over 9.6 months. Good companies get slaughtered alongside garbage. That’s when retail traders panic-sell at bottoms, locking in maximum losses.
The Traps Nobody Warns About
Bull traps destroy accounts constantly. Price breaks above resistance on weak volume—looks bullish. Traders pile in thinking “breakout starting!” Then—bam—price reverses below resistance within hours, stopping everyone out. Research shows 45% of perceived uptrend reversals during downtrends are bull traps.
Bear traps work opposite. Price crashes below support triggering panic selling. Retail traders short or exit positions. Then price rebounds sharply, trapping bears who sold low. Bear traps hit 40% of perceived downtrend reversals during uptrends.
Both traps succeed because traders chase moves without confirmation. Low volume breakouts fail constantly—yet traders ignore that warning.
Warning Signs Bull Markets Are Ending
Earnings stagnate while stock prices keep climbing—dangerous divergence. Corporate profits peaked in 2014 as percentage of GDP but stocks kept soaring until 2022.
When everyone talks about stocks enthusiastically—golf caddies, Uber drivers, neighbors—that’s extreme optimism signaling tops. VIX dropping below 12 for extended periods precedes crashes historically.
Market rallies narrowing to only 5-10 mega-cap stocks while small caps collapse signals weakness. Declining market breadth—fewer stocks making new highs despite index gains—flashes red 3-6 months before tops.
The Catastrophic Mistakes
During bull markets: Ignoring fundamentals kills portfolios. Buying stocks solely because they’re rising guarantees catching falling knives when sentiment shifts. Stopping SIPs thinking lump-sum investing beats disciplined contributions—disaster. Getting greedy by refusing to book profits expecting “new highs are coming”—stocks crash from peaks.
During bear markets: Panic-selling at bottoms locks in losses permanently. Missing early recovery rallies destroys long-term returns—best 10 days happen during crises. Cash sitting idle during bear markets misses bounce-backs that happen suddenly.
Comparing valuations wrongly: “This stock trades P/E 15 while that one’s at 50—must be cheap!” Different industries carry different multiples. Software justifies 40-50x P/E through growth; manufacturing doesn’t.
What Professionals Actually Do
Buy quality companies during bear panic when prices crash 40-50%. Sell overvalued garbage during bull euphoria when fundamentals can’t justify prices.
Use stop-losses ruthlessly. Position size is smaller during high volatility. Never chase breakouts without volume confirmation.
Bear markets last 9.6 months on average—bull markets last 2.7 years. Stocks rise 78% of the time historically. Staying invested through downturns statistically works.
