Market trends

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, and the description of market trends is common to Wall Street.

Market trends are described as periods when bulls (buyers) consistently outnumber bears (sellers), or vice versa. A bull or bear market describes 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
The Charging Bull in Bowling Green, New York is a symbol of the bull market.
The Charging Bull in Bowling Green, New York is a symbol of the 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.

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.

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 in 2000.


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 1930 to 1932, marking the start of the Great Depression.[5] A milder, low-level long-term bear market occurred from about 1967 to 1983, 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. 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 a 12-month period. 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 bull 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 downward trend.


Secular market trends

A secular market trend is a long-term trend that usually lasts 5 to 25 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. 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 nominal gold price fell from a high of $850/oz to a low of $253/oz,[6] which formed part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period.

An example of a secular bull market would be the US Stock market between August 1982 and June 2007. The DJIA, S&P500 and Wilshire 5000 indexes all made new record highs in 2007 with only a single cyclical bear market low in October 2002 after the cyclical bull market high made in March 2000.

These secular bull and bear market trends are also termed "super cycles". "Grand supercycles" of 50 to 300 years have also been proposed by Nikolai Kondratiev and Ralph Nelson Elliott.