Identifying Healthy Bull Markets: 5 Key Indicators

The signs of healthy bull markets range from the technical to the emotional. Investors not only track the difference between a market’s low point and its high point to determine if the bull is running faster or slowing down, they also watch the general level of anxiety in the investing community, which can yield surprising results. In general, signs of healthy bull markets include these plus the performance of mergers and new offerings; advancing stocks over a wide area of the market; and plenty of cash and credit on hand.

No. 1 - Market Highs and Lows

Investment professionals track a statistic they call  “trough to peak” in assessing the health of bull markets. This means noting the low point of stocks at the end of a bear, or declining, market and tracking the percentage increase in the market during its bullish period. As an example, the S&P 500 index has an historic median of an 83 percent increase from trough to peak in a bull market. If a bull market is moving toward this median, but not yet past it, it can be a good sign.

No. 2 - The Fear Factor

If the level of investor anxiety is high, this can be an odd good sign for bull markets. CNBC’s Jim Cramer suggests that uncertainty among investors as a market rises leads them to get in and get out repeatedly, often selling during inevitable, but temporary, declines. This creates opportunities for other investors to buy when prices have dipped and benefit as they continue to rise, and that can add to the overall health of the market.

No. 3 - Stocks Advancing in Many Segments

Healthy bull markets tend to advance in a number of segments. If one area of the market, even a significant one such as technology, is advancing, it can drive the entire market up temporarily. However, experts say healthy bull markets usually display strength in a variety of areas. In other words, those assessing the health of the market want to see broad advances. They look not only to tech, but to manufacturing, finance, retail and transportation. Some say transportation is a good early indicator as shipping ramps up in advance of anticipated demand.

No. 5 - New Offerings and Mergers

If new companies are being launched and their stock performs well, it can be a sign that investors expect the overall health of the economy to be sound and, therefore, the health of a bull market to be sound as well. An increase in reasonably priced mergers and acquisitions can be a similar indicator of healthy bull markets. If companies have been sitting on cash during market uncertainty and are putting it to use to buy other companies, it is a signal that acquisition targets are priced right and conditions are ripe for growth.

No. 5 - Money Is Available

Just as with companies having cash to buy other companies, it can be a sign of healthy bull markets when investors have cash - often taken out of a declining market - and they reinvest it by buying stocks. Similarly, if the banking sector of the market is showing strength and credit is available, it can be an indication of market health.