Everyone is familiar with the bulls and the bears, most investors love it when the bull keeps on climbing and again there are some who wait for the bear ambush to feed on the spoils.
But there are a lot more animals lurking the stocks markets and getting familiar with them can help you make the kill, so to say. What do these animals speak to us and why have animals denote price shifts and more, in the age of algorithms. Well, it goes back to the early agrarian roots of Wall Street. The animal reference helps one to understand the complex ideas and even today, it actually works.
Let us take the bull by its horns, watch out for doomed sheep and beware of the dead cat bounce.
Charging forward – Bulls and Bull Markets
Bull market is party time for most investors. During a bull market, the price of stocks or assets rises continuously and this can last for months and at times years. Stock prices have been on the rise since April 2020 and we can say that we are at present in a bull rally.
The term “bull” was used in association with the markets as early as 1714, according to the Museum of American Finance.
The blood in the market: Bears and Bear Markets
A bear market is when stock or asset prices decline continuously over a period of time. When market crashes by more than 20%, normally it denotes the beginning of a bear phase. But there can be short bear phases in a long bull market. Like a bull market, a bear market too can last for months or years. There are traders who make money by selling the shares they have been holding or going ‘short’ which is to sell stocks that they don’t own and then buy them back at lower prices. Their profit is the difference in prices.
The bears arrived in the market before the bulls and the term bear dates back to around 1709, when it was used as shorthand for the “bearskin jobber” occupation and may have referred to the practice of “selling bearskins before catching the bear,” according to the Museum of American Finance, and it is somewhat similar to what short sellers do now.
Not of the same feather: Hawks and Doves
Often when it comes to central bank’s monetary policy comments, we hear the terms hawkish and dovish. What do these birds signify? Being hawkish is when the policy is tilted towards keeping the inflation under control by allowing interest rates to rise.
Whereas, being dovish means central banks are likely to favour lower interest rates with the hope that it will stimulate the economy.
The winged friends: Butterflies and Condors
Our winged friends are a choice for options strategies. Several options strategies are named after winged creatures, like butterflies and condors that help investors to profit through changes in volatility.
In options contracts, a long butterfly spread, is a 1:2:1 ratio, where the single options on the outside are long positions, or the “wings,” and the two options in the middle are short, making up the “body.” When we analyse the shapes of their risk profile graphs, we can find that the butterfly has a more pointy head than the condor or iron condor.
The gullible and the greedy: Sheep and Pigs
Sheep are investors with a herd mentality; they blindly follow tips and recommendations without thinking for themselves. Often they enter the market at the end of a bull run and exit last as well, so they get slaughtered.
“Pigs” on the other hand make a profit and get greedy. So, these undisciplined investors too get slaughtered by the market.
Live by the trend: Turtle Traders
Is trading a skill or a special gift? In 1980s, legendary commodities trader Richard Dennis and his partner, William Eckhardt conducted an experiment to find out, and guess what, according to them trading is indeed a skill that involves studying and following trends. Turtle traders follow the trend – uptrends (bull markets), downtrends (bear markets), or neutral trends (range-bound markets).
Not an investor’s best friend: Dogs and Dead Cat Bounces
“Beware of the cats and dogs in the market” is an oft-repeated refrain of Dr V K Vijayakumar, Chief investment strategist of Geojit. They are the poor performers or underperformers. Investing in these stocks can leave you with a bad bite. A ‘dog’ stock is one that has a small market share in its industry/ sector and has low growth.
A “dead cat bounce” is a term used when a stock with its price spiraling down suddenly rises, which turns out to be nothing but a temporary respite.
In hindsight, it becomes clear: Black Swan Events
All signs are clearly written in the sky, still all are taken by surprise. That is the Black Swan event.
It is outlier, extreme-impact event that we know can happen, yet we never expect it to happen and are not at all prepared for it. Black Swan examples are: the 2008 collapse of Lehman Brothers, the May 2010 “Flash Crash,” and the 2016 Brexit vote. The term was popularized by Nassim Nicholas Taleb, a finance professor, writer, and former Wall Street trader, in his 2007 book The Black Swan: The Impact of the Highly Improbable.
So, when the animals of the stock market talk, let’s take note.