A market trend is a 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 for short time frames. Traders identify market trends using technical analysis, a framework which characterizes market trends as predictable price tendencies within the market when price reaches support and resistance levels, varying over time.
Secular market trend
A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets.
In a secular bull market the prevailing trend is "bullish" or upward-moving. The United States stock market was described as being in a secular bull market from about 1983 to 2000 (or 2007), with brief upsets including the crash of 1987 and the market collapse of 2000-2002 triggered by the dot-com bubble.
In a secular bear market, the prevailing trend is "bearish" or downward-moving. An example of a secular bear market occurred in gold between January 1980 to June 1999, culminating with the Brown Bottom. During this period the nominal gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g), and became part of the Great Commodities Depression.
Primary market trend
A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more.
A bull market is a period of generally rising prices. The start of a bull market is marked by widespread pessimism. This point is when the "crowd" is the most "bearish". The feeling of despondency changes to hope, "optimism", and eventually euphoria. This is often leading the economic cycle, for example in a full recession, or earlier.
- 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. Notable bull markets marked the 1925-1929, 1953–1957 and the 1993-1997 periods when the U.S. and many other stock markets rose; while the first period ended abruptly with the start of the Great Depression the end of the later time periods were mostly periods of soft landing, which became large bear markets. (see: Recession of 1960-61 and the dot-com bubble in 2000-01)
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."
- 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 examples occurred between October 2007 and March 2009, as a result of the financial crisis of 2007–08.
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.
- 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 1,565 and the Nasdaq at 2861.50.
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.
- 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).
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. An example occurred from April to June 2010, when the S&P 500 went from above 1200 to near 1000; this was hailed as the end of the bull market and start of a bear market, but it was not, and the market turned back up. 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.
The price of assets such as stocks is set by supply and demand. 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. For a surge in demand, the buyers will increase the price they are willing to pay, while the sellers will increase the price they wish to receive. For a surge in supply, the opposite happens.
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.
According to standard theory, a decrease in price will result in less supply and more demand, while an increase in price will do the opposite. This works well for many assets but it works not so well for stocks due to the "buy-high, sell-low" investors. In case an increase in price causes an increase in demand, or a decrease in price causes an increase in supply, this destroys the expected negative feedback and prices will be unstable. This can be seen in a bubble or crash.
Investor sentiment is a contrarian stock market indicator.
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:
David Hirshleifer sees in the trend phenomenon a path starting with underreaction and ending in overreaction by investors / traders.
- 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.
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.
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 somewhat dated 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.
- The word "bull" plays off the market's returns being "full" whereas "bear" alludes to the market's returns being "bare".
- "Bull" symbolizes charging ahead with excessive confidence whereas "bear" symbolizes preparing for winter and hibernation in doubt.
- Mr. Market
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- Bull-bear line
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- Trend following
- Economic expansion
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- Animal spirits
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- Bull Market
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- Market trend definition, explanations, and examples provided in simple terms
- Description and Charts of Trend Indicators