What Does it Mean to be Bearish?
A bearish investor, also known as a bear, believes prices will go down. As with a bullish investor, investors can be bearish about the market as whole or individual stocks, or specific sectors. Someone who believes, for example, that the supply of ABC Corp. will soon go down is said to be bearish on that company. An investor who foresees a market-wide dip in stocks, bonds, commodities, currencies, or alternative investments like collectibles is said to be bearish because they anticipate a sustained and significant downturn.
A bear market is one in which the prices of securities in a critical market index (like the S&P 500) have been falling by at least 20% for some time. This isn’t a short-term dip like the one you’ll see during a correction, a period when there are declines in prices of 10% to 20%. A bear market is a trend that leaves investors feeling pessimistic about the future outlook of financial markets or some part of a financial market. A secular bear market lasts for years. The longest U.S. bear market was 61 months, from March 10, 1937, to April 28, 1942. The most severe bear market chopped 86% from its value; it extended from Sept. 3, 1929, to July 8, 1932.
It might be said that the prevailing sentiment of investors who expect a bear market is a fear that a coming downturn will wipe out wealth.
Where the Term Bearish Came From
The term bear market most likely came from both parable and practice relating to the trade of bearskins during the 18th century. During this era, fur traders would, on occasion, sell the skin of a bear which they had not caught yet. They did this as an early form of short selling, trading in a commodity they did not own in the hopes that the market price for that commodity would dip. When the time came to deliver on the bearskin, the trader would, theoretically, go out and buy one for less than the original sale price and profit from the transaction.
While this worked often enough to keep the practice going, it usually failed. This led to widespread expressions of the time such as “don’t sell the bear’s skin before catching the bear,” “selling the bearskin,” and “bearskin jobber.” All of these referred to a warning about speculation and making promises you can’t keep. At the same time, a bearskin jobber called someone a cheat and a liar. Today’s equivalent would be on the order of “don’t count your chickens before they’re hatched” and “snake oil salesman.”
But the expressions took on a more specific meaning among investors and stock traders, who understood the practice of speculating on an anticipated downturn. Among investors, the term “bearskin trader” and eventually just “bear trader” came to refer to someone who traded stocks the same way disreputable fur traders dealt in pelts. A “bear” sold a stock he didn’t yet own, in the same way, that trappers once sold the pelt of a bear they hadn’t caught, then repurchased the stock in the hopes of doing so at a lower price and pocketing the difference – in effect a short sale.
Eventually, the term bear expanded. Instead of referring specifically to short-sale traders, investors began referring to anyone who expected price dips as bearish and declining prices as a bear market.
Bullish vs. Bearish
Being “bullish” is the opposite of being bullish.
While being bearish means, you are pessimistic that prices will go higher from where they currently are, being bullish is the opposite: you think prices will trade higher from where they currently are.
Bearish traders will look to take short positions. Bullish traders are looking to take long classes to profit if the market goes up from its current price.