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Basics of Stock Market & Understanding Bulls, Bears & Sentiments of Share Market

Basics of Stock Market & Understanding Bulls, Bears & Sentiments of Share Market

The stock market is made up of different types of participants. There are traders who think the market will go up and others who think the market will go down. While traders take a very short term view of markets, the investors typically take a long term view of the market. It is this mix of different types of traders and investors that actually gives diversity to the markets.

Different Views Create the Market

There the bulls who believe that the price of a stock will go up and they buy the stock. They there are bears who believe that the price of a stock will go down and they sell the stock. It is this interplay of positive and negative views on stocks and markets that actually creates the market.

If all players are bullish or if all players are bearish then there is no market in existence! It is only when positive sentiments combine with negative sentiments that we actually have a market that is robust and represents different points of view. That is what determines the market sentiments.

Different Types of Stock Market Sentiments

Bullish market sentiments
This is a market where most of the market participants are expecting the stock price to go up. You can say that there is a lot of bullishness that is built into the stock prices. Bullish sentiments can have created typically when there is a sharp growth in GDP or sharp growth in profits or if there is very aggressive buying by FIIs and mutual funds.

Moderately bullish market sentiments
This is a sentiment where people expect the stock prices to go up but do not expect a runaway bull rally. They prices are likely to be positive in this expectation but the upsides could be capped. This market has to be approached from a different angle and with a different set of strategies altogether.

Bearish Market sentiments
This is the market where players in the stock market are extremely negative on the markets. They expect the stock prices to correct sharply from current levels and they plan either by selling delivery stock or by shorting stocks. Some players also play the bearish market by selling stock futures, index futures or by purchasing put options.

Moderately bearish sentiments
This is a very normal feeling when the markets have run up quite sharply in a short span of time. This is also called a sceptical market where markets are expecting a correction in prices but nobody is really expecting a deep correction.

That means traders and investors continue to be positive on the market sentiment overall but they expect intermittent corrections. The idea is to use these dips to buy into the market at attractive levels.

Volatile and tepid market sentiments
These are called as non-directional market sentiments. There are times when traders expect that the market could get very volatile and start fluctuating wildly. However, nobody is sure if it will result in a bear market or a moderately bear market. This happens when there are global cues like the Middle East crisis, Greek Crisis or the Turkish Lira crisis.

Under these circumstances the markets become very volatile and keep fluctuating without any direction. The reverse of that is a tepid market or a range bound market. In the absence of any cues, the markets remain tightly bound in a range and don’t show any discernible movement.

How Market Players Act on the Market Sentiments?

Each market sentiment vector has a specific approach to deal with it. You’re trading or investment strategy is determined accordingly.

How to trade in a bullish market?
In a bullish market you can either buy with momentum or buy on dips. The idea is not to get caught on the short side of the market. In a bullish market, investors typically use trailing stop losses to hold on to their winning positions for as long as possible.

How to trade in a bearish market?
A bear market is typically a sell on rises market. You cannot sell for more than a day so if you don’t short intraday then you have to sell from your demat account. Another way is to either sell the futures to hedge against a bear market or reduce your risk by purchasing put options.

How to play the non-directional markets?
This is where options are extensively used. For example, in case of volatile markets where the direction is not clear, one can buy calls and puts at the same time (also called strangles).

If the trader is expecting a range bound market, then they can look to sell a call and put at the same time (also called a reverse strangle). Market does offer a variety of options.

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