Market trend

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A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary lasting short times. Traders identify market trends using technical analysis, a framework which characterizes market trends as a predictable price tendencies within the market when price reaches support and resistance levels, varying over time.

The terms bull market and bear market describe upward and downward market trends, respectively, and can be used to describe either the market as a whole or specific sectors and securities. and became part of the Great Commodities Depression.

Secondary market trend

Secondary trends are short-term changes in price direction within a primary trend. The duration is a few weeks or a few months.

One type of secondary market trend is called a market correction. A correction is a short term price decline of 5% to 20% or so. A correction is a downward movement that is not large enough to be a bear market (ex post).

Another type of secondary trend is called a bear market rally (sometimes called "sucker's rally" or "dead cat bounce") which consist of a market price increase of only 10% or 20% and then the prevailing, bear market trend resumes. 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 225 has been typified by a number of bear market rallies since the late 1980s while experiencing an overall long-term downward trend.

Primary market trend

A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more. ===Bull market=== A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases (capital gains). A bullish trend in the stock market often begins before the general economy shows clear signs of recovery.

Examples

India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. A notable bull market was in the 1990s and most of the 1980s when the U.S. and many other stock markets rose; the end of this time period sees the dot-com bubble.

Bear market

A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism. 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." It is sometimes referred to as "The Heifer Market" due to the paradox with the above subject.

Examples

A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. Another long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high unemployment of the early 1980s. Yet another bear market occurred between March 2000 and October 2002. The most recent example occurred between October 2007 and March 2009.

Market top

A market top (or market high) is usually not a dramatic event. The market has simply reached the highest point that it will, for some time (usually a few years). It is retroactively defined as market participants are not aware of it as it happens. A decline then follows, usually gradually at first and later with more rapidity. William J. O'Neil and company report that since the 1950s a market top is characterized by three to five distribution days in a major market index occurring within a relatively short period of time. Distribution is a decline in price with higher volume than the preceding session.

Examples

The peak of the dot-com bubble (as measured by the NASDAQ-100) occurred on March 24, 2000. The index closed at 4,704.73 and has not since returned to that level. The Nasdaq peaked at 5,132.50 and the S&P; 500 at 1525.20.

A recent peak for the broad U.S. market was October 9, 2007. The S&P; 500 index closed at 1,576 and the Nasdaq at 2861.50.

Market bottom

A market bottom is a trend reversal, the end of a market downturn, and precedes the beginning of an upward moving trend (bull market).

It is very difficult to identify a bottom (referred to by investors as "bottom picking") while it is occurring. The upturn following a decline is often short-lived and prices might resume their decline. This would bring a loss for the investor who purchased stock(s) during a misperceived or "false" market bottom.

Baron Rothschild is said to have advised that the best time to buy is when there is "blood in the streets", i.e., when the markets have fallen drastically and investor sentiment is extremely negative.

Examples

Some examples of market bottoms, in terms of the closing values of the Dow Jones Industrial Average (DJIA) include: The Dow Jones Industrial Average hit a bottom at 1738.74 on 19 October 1987, as a result of the decline from 2722.41 on 25 August 1987. This day was called Black Monday (chart). A bottom of 7286.27 was reached on the DJIA on 9 October 2002 as a result of the decline from 11722.98 on 14 January 2000. This included an intermediate bottom of 8235.81 on 21 September 2001 (a 14% change from 10 September) which led to an intermediate top of 10635.25 on 19 March 2002 (chart). The "tech-heavy" Nasdaq fell a more precipitous 79% from its 5132 peak (10 March 2000) to its 1108 bottom (10 October 2002).

A bottom of 6,440.08 (DJIA) on 9 March 2009 was reached after a decline associated with the subprime mortgage crisis starting at 14164.41 on 9 October 2007 (chart).

Investor sentiment

Investor sentiment is a contrarian stock market indicator.

By definition, the market balances buyers and sellers, so it's impossible to literally have 'more buyers than sellers' or vice versa, although that is a common expression. The market comprises investors and traders. The investors may own a stock for many years; traders put on a position for several weeks down to seconds.

Generally, the investors follow a buy-high, sell-low strategy. Traders attempt to "fade" the investors' actions (buy when they are selling, sell when they are buying). A surge in demand from investors lifts the traders' asks, while a surge in supply hits the traders' bids.

When a high proportion of investors express a bearish (negative) sentiment, some analysts consider it to be a strong signal that a market bottom may be near. The predictive capability of such a signal (see also market sentiment) is thought to be highest when investor sentiment reaches extreme values. Indicators that measure investor sentiment may include:

Investor Intelligence Sentiment Index: If the Bull-Bear spread (% of Bulls - % of Bears) is close to a historic low, it may signal a bottom. Typically, the number of bears surveyed would exceed the number of bulls. However, if the number of bulls is at an extreme high and the number of bears is at an extreme low, historically, a market top may have occurred or is close to occurring. This contrarian measure is more reliable for its coincidental timing at market lows than tops.

American Association of Individual Investors (AAII) sentiment indicator: Many feel that the majority of the decline has already occurred once this indicator gives a reading of minus 15% or below.

Other sentiment indicators include the Nova-Ursa ratio, the Short Interest/Total Market Float, and the Put/Call ratio.

Market capitulation

Market capitulation refers to the threshold reached after a severe fall in the market, when large numbers of investors can no longer tolerate the financial losses incurred. These investors then capitulate (give up) and sell in panic, or find that their pre-set sell stops have been triggered, thereby automatically liquidating their holdings in a given stock. This may trigger a further decline in the stock's price, if not already anticipated by the market. Margin calls and mutual fund and hedge fund redemptions significantly contribute to capitulations.

The contrarians consider a capitulation a sign of a possible bottom in prices. This is because almost everyone who wanted (or was forced) to sell stock has already done so, leaving the buyers in the market, and they are expected to drive the prices up.

The peak in volume may precede an actual bottom.

Changes with consumer behavior

Market trends are fluctuated on the demographics and technology. In a micro economical view, the current state of consumer trust in spending will vary the circulation of currency. In a micro economical view, demographics within a market will change the advancement of businesses and companies. With the introduction of the internet, consumers have access to different vendors as well as substitute products and services changing the direction of which a market will go.

Despite that it is believed that market trends follow one direction over a matter of time, there are many different factors that change can change this idea. Technology s-curves, explained in the book The Innovator's Dilemma, states that technology will start slow then increase in users once better understood but level off once another technology replaces it, proving that change in the market is actually consistent.

Etymology

The precise origin of the phrases "bull market" and "bear market" are obscure. The Oxford English Dictionary cites an 1891 use of the term "bull market". In French "bulle spéculative" refers to a speculative market bubble. The Online Etymology Dictionary relates the word "bull" to "inflate, swell", and dates its stock market connotation to 1714.

The fighting styles of both animals may have a major impact on the names. When a bull fights it swipes its horns up; when a bear fights it swipes down on its opponents with its paws. When the market is going up, it is similar to a bull swiping up with its horns. When the market is going down it is similar to a bear swinging its paws down.

One hypothetical etymology points to London bearskin "jobbers" (market makers), 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. 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.

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. However in a falling market, the counterparties—the "bearers" of the commodity to be delivered—win because they have locked in a future delivery price that is higher than the current price.

Some analogies that have been used as mnemonic devices: Bull is short for 'bully', in its now mostly obsolete meaning of 'excellent'. It relates to the speed of the animals: bulls usually charge at very high speed whereas bears normally are thought of as lazy and cautious movers —a misconception because a bear, under the right conditions, can outrun a horse. They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes. Bears hibernate, while bulls do not. The word "bull" plays off the market's returns being "full" whereas "bear" alludes to the market's returns being "bare".

In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as the herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements.

International sculpture team Mark and Diane Weisbeck were chosen to re-design Wall Street's Bull Market. Their winning sculpture, the "Bull Market Rocket" was chosen as the modern, 21st century symbol of the up-trending Bull Market.

See also

Black Monday

Bull-bear line

Business cycle

October 27, 1997 mini-crash

September 11, 2001

Stock market downturn of 2002

Trend following

Recession

Economic expansion

Market sentiment

References

External links

Market trend definition, explanations, and examples provided in simple terms

Braze, David. What Is a Bear Market? The Motley Fool.

Stock Market Dictionary

Category:Financial markets Category:Financial economics Category:Investment Category:Behavioral finance