A kangaroo market is one that hops up and down over a period of time without any strong positive or negative trend. In a kangaroo market, stock prices swing up and dive down rapidly without any obvious triggering news. The frequent bounces and falls culminate in a lack of direction and often exhibit extreme volatility in the market.
If you thought that the stock market is represented by two animal symbols, think again. You may have heard of the bull market and the bear market for their tendency to drive changes in the stock price on the positive and the negative side respectively. But do you know what represents the in-between volatile phase? The kangaroo.
First, what are the bull and bear markets? A bull market usually means a 20% rise in the stock market over time from its bottom as there is a strong demand for stocks during this phase which pushes up the price. This is called ''the bull phase'' because of the way the bull attacks its opponents and throws them up in the air.
A bear market means that the stock market will fall 20% or more from its most recent high as investors tend to bail out during such a market and sell off their shares, which sends share prices crashing. As bears swipe their paws down when attacking their prey, this symbolizes the stock market's negative movements too.
So what is a kangaroo market?
A kangaroo market can be said to be a phase in which stocks frequently change values and “bounce up and down” over a period of time, without any stable rising or declining trends. Though this isn't an official term, it's a term casually used by many.
How is a kangaroo market different from a bull or bear market? Since a kangaroo market does not show consistent upward or downward trends and there is no clear direction to the markets, most technical and fundamental analyses come to a standstill and people choose to wait and watch. The phase is characterised by sharp rises and declines, but with the expectation that it will not last and will change within days.
What does one do during this kangaroo phase? Though this is a volatile time, the market offers patient investors an opportunity to enter the markets and stay put if they want to build wealth over a long time. For eg: during the Covid-19 pandemic, from November 2019 to June 2020, stock prices were volatile. Though indexes fell by 23% in March, they rose by 14% in April. During these times, it is best to invest when the markets are down since the markets always rise up.
Investing at a time when stock prices are down makes sense because many well-managed companies that have strong balance sheets, sustainable cash flows and a quantifiable future outlook, are available at relatively lower valuations during unstable times as compared to stable times.