Market trends
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In investing, financial markets are commonly believed to have market trends that can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). This belief is generally consistent with the non-scientific practice of technical analysis and broadly inconsistent with the efficient markets hypothesis.
A bull market is a prolonged period of time when prices are rising in a financial market faster than their historical average, in contrast to a bear market which is a prolonged period of time when prices are falling.
Investors can be described as having bullish or bearish sentiments. Market trends are witnessed when bulls (buyers) outnumber bears (sellers), or vice versa, consistently over time. In general, a bull or bear market refers to the market and sentiment as a whole but it can also be used to refer to specific securities, sectors, or similar ("bullish on IBM", "bullish on technology stocks" or "bearish on gold", for example).
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[edit] Primary market trends
[edit] Bull market
A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of further capital gains. The longest and most famous bull market was in the 1990s when the U.S. and many other global financial markets grew at their fastest pace ever [1].
In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also described as a bull run. Dow Theory attempts to describe the character of these market movements.
[edit] Bear market
A bear market tends to be accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history was the Great Depression of the 1930s [2].
Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time. By one common definition, a bear market is marked by a price decline of 20% or more in a key stock market index from a recent peak over at least a two-month period. [citation needed] However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.
[edit] Secondary market trends
A secondary trend is a temporary change in price within a primary trend. These usually last a few weeks to a few months. A temporary decrease during a bull market is called a correction; a temporary increase during a bear market is called a bear market rally.
Whether a change is a correction or rally can be determined only with hindsight. When trends begin to appear, market analysts debate whether it is a correction/rally or a new bull/bear market, but it is difficult to tell. A correction sometimes foreshadows a bear market.
[edit] Correction
A market correction is a sometimes defined as a drop of at least 10%, but not more than 20% (25% on intraday trading).
Major disasters or negative geopolitical events can spark a correction. One example is the performance of the stock markets just before and after the September 11, 2001 attacks. On September 7, 2001, the Dow fell 234.99 points to 9,605.85, thoroughly pushing the Dow into a correction. On September 17, 2001, the first day of trading after the attacks, the Dow Jones Industrial Average plunged 684.81 points to 8,920.70. That loss officially pushed the Dow, not just even further into a correction, but a bear market. (Although unless investors had prior knowledge of the events of September 11, 2001, it would be impossible for the attacks to have had an effect on the markets ahead of time.)
Because of depressed prices and valuation, market corrections can be a good opportunity for value-strategy investors. If one buys stocks when everyone else is selling, the prices fall and therefore the P/E ratio goes down. In addition, one is able to purchase undervalued stocks with a highly probable upside potential.
[edit] Bear market rally
A bear market rally is sometimes defined as a rise of at least 10%, but no more than 20%.
Notable bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading up to the market bottom in 1932, as well as throughout the late 1960s and early 1970s. The Japanese Nikkei stock average has been typified by a number of bear market rallies since the late 1980s while experiencing an overall downward trend.
[edit] Secular market trends
A secular market trend is a long-term trend that lasts 5 to 20 years, and consists of sequential primary trends. In a secular bull market the bear markets are smaller than the bull markets. Typically, each bear market does not wipe out the gains of the previous bull market, and the next bull market makes up the losses of the bear market. Conversely, in a secular bear market, the bull markets are smaller than the bear markets and do not wipe out the losses of the previous bear market.
An example of a secular bear market was seen in gold over the period between January 1980 to June 1999, over which the gold price fell from a high of $850/oz to a low of $253/oz [3], which formed part of the Great Commodities Depression. Conversely, the S&P 500 experienced a secular bull market over a similar time period [4].
These secular bull and bear market trends are also termed "supercycles". "Grand supercycles" of 50 to 300 years have also been proposed by Nikolai Kondratiev and Ralph Nelson Elliott.
[edit] Market events
An exaggerated bull market fueled by overconfidence and/or speculation can lead to a stock market bubble. At the other extreme, an exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a stock market crash and a recession.
[edit] Causes
Both bull and bear markets may be fueled by sound economic considerations and/or by speculation and/or investors psychological biases. The stock market is controlled by people and, as a result, emotions. Expectations play a large part in financial markets and in the changes from bull to bear environments. More precisely, attention should be paid to positive surprises and negative surprises. The tendency is for positive surprises to characterise a bull market (when the news continually tends to exceed investor's expectations) and conversely negative surprises tend to characterise the bear market (with expectations disappointed).
[edit] Technical analysis
Technical analysis attempts to determine whether a market or security is in a bull or bear phase and to generate trading strategies to exploit this phase. Many technical analysts believe that financial markets are cyclical and move in and out of bull and bear market phases regularly.
[edit] Etymology
The precise origin of the phrases "bull market" and "bear market" is obscure. The most common etymology points to London bearskin "jobbers" (brokers),[citation needed] who would sell bearskins before the bears had actually been caught in contradiction of the proverb ne vendez pas la peau de l'ours avant de l’avoir tué ("don't sell the bearskin before you've killed the bear")—an admonition against over-optimism [citation needed]. By the time of the South Sea Bubble of 1721, the bear was also associated with short selling; jobbers would sell bearskins they did not own in anticipation of falling prices, which would enable them to buy them later for an additional profit.
Some analogies that have been drawn, but are likely false etymologies:
- It relates to the common use of these animals in bloodsport, i.e bear-baiting and bull-baiting.
- It refers to the way that the animals attack: a bull attacks with its horns from bottom up; a bear attacks with its paw from above, downward.
- It relates to the speed of the animals: bulls usually charge at very high speed whereas bears normally are lazy and cautious movers.
- They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes.
- Bears hibernate, while Bulls do not.
- Bears keep their chin up, while Bulls keep their chin down.
- Bear neck points down while Bull's points upwards.
Another plausible origin is from the word "bulla" which means bill, or contract. When a market is rising, holders of contracts for future delivery of a commodity see the value of their contract increase. In a falling market, the counterparties--the "bearers" of the commmodity to be delivered, win because they have locked in a price higher than the present for future delivery.
[edit] Historic examples
- In May 2006, emerging markets including India witnessed a correction. Indices fell as much as 20% before resuming the secular bull run.
- The most recent example of a correction preceding a bear market was the stock market performance during the 3rd quarter of 2001. Dismal job, labor, and retail numbers in addition to the September 11 attacks pushed the stock market into a correction and later a bear market by September 2001 that lasted until December 2002.
- The Black Monday crash of 1987 did not push the markets into a bear market. It was a sharp, dramatic correction within an upward trend.
- The October 27, 1997 mini-crash is considered a somewhat more minor stock market correction when compared to Black Monday, but, like the 1987 crash, it was a correction during an upward trend.
[edit] See also
- Trend following
- Business cycle
- Financial markets
- List of finance topics
- Stock market
- Technical analysis
[edit] External links
- Braze, David. What Is a Bear Market? The Motley Fool.
- Quinion, Michael Bulls and Bears, World Wide Words, [5].
- Rejoice in a Stock Market Correction
- Secular market trends
- Investment Trivia: History of Bulls and Bears
- Trend following systems Explains the basic concepts of trend following systems.
- Article about how Richard Farleigh used trends
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