Being bearish means that an investor feels that investment positions, or the market in general, will decline. An investor can be bearish on a particular stock, bond, sector, commodity, or general market.
What Is A Bear Investor?
Bearish investors may be referred to simply as bears. Bears think security prices will decline, either due to fundamental shifts, high valuations, or technical reasons. Bearish investors who want to take advantage of downturns can take Short positions in an attempt to profit off of the decline in prices.
In a Short position, the investor sells stock to another investor at market price with the intention of buying it back later at a lower price. The bear is expecting the stock to go down. The risk here is that if the stock rises, the Short position will be losing value. The investor may have to buy the stock at a higher market price – over and above what they sold it at, resulting in losses.
Tip: A bearish investor is pessimistic on security values, while a bullish investor is optimistic on security values.
There exists an options strategy called a bear spread, which bearish investors can attempt to profit from applying. The strategy involves buying a put option at one exercise price, and selling another put option with a lower exercise price, on the same security.
Some bearish investors don't make financial bets on security prices dropping, but simply have a negative sentiment on the markets.
What Is A Bear Market?
A bear market involves a significant and sustained downward trend in the stock market. When stock markets drop by 20% or more from a particular point, they are considered to be in a bear market. Conventionally the 20% drop needs to occur over a period of at least two months. A significant but sudden drop in the stock market may not be deemed a bear market.
A market correction is defined as a 10% dip in the stock market, versus a 20% decline representing a bear market. A correction or bear market can often be triggered by worsening economic conditions, concerns about valuations, or other reasons which result in a large number of investors becoming pessimistic.
Bear markets can extend for significant periods of time. The longest U.S. bear market was from March 1937 to April 1942, lasting 61 months. It saw a 55% decline.
What Is A Bearish Stock Perspective?
Investors can be bearish about the entire stock market, a sector, or individual stocks. A bearish stock perspective involves a belief that a stock or market will struggle and may see price declines. In a bear market, many investors may choose to sit out of the market while others look for opportunities to profit on declining stock prices.
When an investor is optimistic on a security price or market overall, they are said to be bullish.
What Are Bearish Stock Patterns?
Investors can look for specific technical patterns to identify bearish stocks or market trends. Investors need to realize that bearish stock patterns are helpful but not always indicative of a bear trend. Let’s consider five common bear chart patterns that investors can learn to use in their technical analysis of stocks:
Double top: This pattern often looks like an M at the end of a bull trend. It marks the end of the uptrend with a peak, then a valley followed by another peak that is near or equal to the high point. It is considered bearish once the stock drops below the bottom price in between the two peaks.
Descending triangle: This is a triangle set up with decreasing highs with the same resistance level. It is normally a sell signal when the stock drops below the resistance level.
Bear flag: Marked by a sudden drop in the stock price (flag pole) followed by trading in the flag that has highs and lows that are equally apart. For example, a stock might drop from $10 a share to $8 a share and then trade between $8 and $8.25 for a period of time. At the end of the bear flag, the stock is expected to drop similarly to the first flag pole.
Bearish engulfing candle: Occurs when the body of one trading session engulfs a previous session. This means that the new days’ open is higher than the previous day with the close being lower than the previous day.
Head-and-shoulders: A pattern with three tops, with the middle top being the highest and looking like the head. The neckline represents the support of the trend and if the stock drops below the neckline, the stock is expected to continue to decline.
Bullish Vs. Bearish Stock Perspectives
Bullish and bearish describe opposite sentiments of the market, particular sectors, or stocks. The bullish perspective refers to the belief that the security prices will increase in value. The bearish perspective is the opposite of that, with investors feeling that security prices will drop.
Sentiment is significant to market direction. If the majority of investors are bullish and buying stocks, markets tend to rise. If the majority of investors are bearish, markets may fall.
Important: Sentiment isn't a permanent status. Bearish investors can become bullish if market conditions or valuations change, and vice versa.
Bearish investors are negative on specific stocks or overall markets. They may reduce their portfolio allocation to stocks, focus on more defensive securities, an/or make financial bets on downward price movements.
This article was written by
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