Market trend
In investing, financial markets are commonly believed to have market trends[1] that can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). This belief is generally consistent with the practice of technical analysis and broadly inconsistent with the standard academic view of financial markets, the efficient market hypothesis.
That market prices do move in trends is one of the major assumptions of technical analysis,[2] and the description of market trends is common to Wall Street.[3]
Market trends are described as periods when bulls (buyers) consistently outnumber bears (sellers), or vice versa. The terms "bull market" and "bear market" describe the trend and sentiment driving it, but can also refer to specific securities and sectors ("bullish on IBM", "bullish on technology stocks," or "bearish on gold", etc.).
Primary market trends
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.[4]
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.
India's BSE SENSEX increased from 14000 points to 21000 points in a period of 1 yr from Jan 2007 to Jan 2008.
The United States has been described as being in a long-term bull market since about 1983, with brief upsets including the Panic of 1987 and the NASDAQ crash of 2000-2002.
Bear market
A bear market is described as being 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 after the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression.[5] A milder, low-level long-term bear market occurred from about 1967 to 1982, encompassing the stagflation economy, energy crises in the 1970s, and high unemployment in the early 1980s.
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. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period."[6] However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.
Investors frequently confuse bear markets with corrections. Corrections are much shorter lived, whereas bear markets occur over a longer period with typically a greater magnitude of loss from top to bottom.
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.
Correction
A market correction is sometimes defined as a drop of 10% to 20% (25% on intraday trading) over a short period of time. It differs from a bear market mostly in that it has a smaller magnitude and duration. 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. Also, one is able to purchase undervalued stocks with a highly probable upside potential.
Bear market rally
A bear market rally is sometimes defined as an increase of 10% to 20%.
Notable bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading down to the market bottom in 1932, and 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 long-term downward trend. Bear market rallies are typically very sharp, sudden, and short-lived.
Secular market trends
A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential 'primary' trends. In a secular bull market the 'primary' bear markets are almost always shorter and less punishing than the 'primary' bull markets are rewarding. Each bear market rarely (if ever) wipes out the real (inflation adjusted) gains of the previous bull market, and the succeeding bull market usually makes up for the real losses of any bear market. In a secular bear market, the 'primary' bull markets are sometimes shorter than the 'primary' bear markets (not often in the stock market), but rarely wipe out the real losses of the 'primary' bear markets during the cycle.
If you look at the 1966 - 82 secular bear market in stocks, there was hardly any nominal loss, But, in real terms the loss was devastating! (In the past, most 'housing recessions' were of this slow nature— allowing inflation to keep housing prices steady)
An example of a secular bear market was seen in gold over the period between January 1980 to June 1999, over which the nominal gold price fell from a high of $850/oz to a low of $253/oz,[7] which formed part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period (~1982 - 2000).[8]
Market events
An exaggerated bull market fueled by overconfidence and/or speculation can lead to a market bubble— which is usually signaled by an extreme inflation in the P/E ratios of the market commodities, e.g., stocks. At the other extreme, an exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a market crash and, in the case of the stock market, is often associated with a recession. The 1987 stock market crash was famously not associated with any recession.
Causes
Both bull and bear markets may be fueled by sound economic considerations and/or by speculation and/or investors' cognitive biases and emotional biases.
Expectations play a large part in financial markets and in the changes from bull to bear environments. More precisely, attention should be paid to reactions to information, chiefly positive surprises and negative surprises. The tendency is for positive surprises to fuel a bull market (when the news continually tends to exceed investor's expectations) and negative surprises tend to feed a bear market (with expectations disappointed). Also, some behavioral finance studies (Richard Thaler) show the role of the underreaction-adjustment-overreaction process in the formation of market trends.
Technical analysis
Many investors and analysts use technical analysis to try to identify whether a market or security is in a bull or bear phase, and to generate trading strategies to exploit the trend. Technical analysts believe that financial markets are cyclical and move in and out of bull and bear market phases regularly.
Etymology
The precise origin of the phrases "bull market" and "bear market" is obscure. The Oxford English Dictionary cites an 1891 use of the term "bull market".
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:
- Bull is short for "bully," in its now mostly obsolete meaning of "excellent."
- It relates to the common use of these animals in blood sport, i.e bear-baiting and bull-baiting.
- It refers to the way that the animals attack: a bull attacks upwards with its horns, while a bear swipes downwards with its paws.
- 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.
- The word "bull" plays off the market's return's being "full" whereas "bear" alludes to the market's returns being "bare".
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 commodity to be delivered, win because they have locked in a price higher than the present for future delivery.
Historic examples
- The Crash of 1929 was an end to the bull market that existed throughout the 1920's.
- 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.
- The stock market downturn of 2002.
- In May 2006, emerging markets including India witnessed a correction. Indices fell as much as 20% before resuming the secular Bull Run.
Notes
- ^ Investorswords.com, retrieved 30 May 2007.
- ^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), p. 2.
- ^ New York Stock Exchange (NYSE Info Tools), retrieved 30 May 2006.
- ^ Yahoo! Finance Charts
- ^ Yahoo! Finance Charts
- ^ Vanguard - Staying calm during a bear market
- ^ http://www.kitco.com/LFgif/au968-999.gif
- ^ Quotes for ^GSPC - Yahoo! Finance
See also
- Business cycle
- Financial markets
- List of finance topics
- Stock market
- Technical analysis
- Trend following
- Keynesian beauty contest