Trend-Followers Live Above the Fray

One might ask why a trend-follower would write about the psychology of bull and bear markets. After all, one mantra of trend-following is, as playwright Thornton Wilder said, "My advice to you is not to inquire why or whither, but just enjoy your ice cream while it's on your plate."

The entire concept of trend-following is such that we are immune to the noise and emotion of the market, focused instead on the mechanical and unemotional way the market moves and stretches up and down as it trends over time. We believe that 2 plus 2 always equals 4 whether or not the sun is shining or it is cloudy outside.

And those beliefs allow us to simply "enjoy the ice cream" on our plates in uptrends as well as downtrends, regardless of earning statements or interest rates. Still, an immunity to the emotional side of investing depends on an understanding of market mentality during its major phases.

Let's look first at what defines a bull or bear market. In simplest terms, a bull market is a prolonged rising market, or one that's increasing in overall value, and a bear market is one that is falling in valuation. To qualify as one or the other, the market must have been moving in its current direction for a sustained period of time.

Most analysts agree that, by broadest definition, the market must increase by about 20% of its value to qualify as a bull market and decrease by about 20% to qualify as a bear market -- anything less is labeled a pullback or a correction.