Bull market

All you want to know about Bull market

A Market trend is the direction in which a financial market is moving. Market trends can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). This principle incorporates the idea that market cycles occur with regularity and persistence. This belief is considered to be generally consistent with the practice of technical analysis and broadly inconsistent with the standard academic view of financial markets, the efficient market hypothesis. [1] Another academic viewpoint is that market prices follow a random walk model and that any apparent past 'trends' are purely an accumulation of random variations and do not serve as a predictor for future performance. Random walk theory suggests that it is therefore not possible to outperform the general market using traditional evaluations of its "fundamentals" or by using technical analysis. [2]

However, the assumption that market prices move in trends is one of the major components of technical analysis,[3] and consideration of market trends is common to most Wall Street investors. Market trends are described as sustained movements in market prices over a period of time. The terms bull market and bear market describe upward and downward movements respectively and can be used to describe either the market as a whole or specific sectors and securities (stocks). The expressions "bullish" and "bearish" can also mean optimistic and pessimistic respectively ("bullish on technology stocks," or "bearish on gold", etc).

Contents

Primary market trends

A primary trend has broad support throughout the entire market or market sector and lasts for a year or more.

Bull market

A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains. 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 sometimes described as a bull run. Dow Theory attempts to describe the character of these market movements.

India's BSE Index SENSEX was in a bull run for almost one year from January 2007 to January 2008 as it increased from 14,000 points to 21,000 points. Another notable and recent bull market was in the 1990s when the U.S. and many other global financial markets rose rapidly.

Bear market

A bear market is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history was preceded by the Wall Street Crash of 1929 and lasted from 1930 to 1932, marking the start of the Great Depression. A milder, low-level, long-term bear market occurred from about 1973 to 1982, encompassing the stagflation of U.S. economy, the 1970s energy crisis, and the high unemployment of the early 1980s. The Financial crisis of 2007–2008‎ has all the traits of the start of new global bear market.

Prices fluctuate constantly on the open market. To take the example of a bear stock market, it is not a simple decline, but a substantial drop in the prices of the majority of stocks 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."[4]

Secondary market trends

Secondary trends are short-term changes in price direction against a primary trend. They usually last between a few weeks and a few months. Whether a trend is a secondary trend, or the beginning of a primary trend, can only be known once it has either ended or has exceeded the extent of a secondary trend.

A decline in prices during a primary trend bull market is called a market correction. A correction is usually a decline of 10% to 20%, but some experts say it can be a third or more.[5] It differs from a bear market mostly in that it has a smaller magnitude and duration.

An increase in prices during a primary trend bear market is called a bear market rally. A bear market rally is sometimes defined as an increase of 10% to 20%. Bear market rallies typically begin suddenly and are often short-lived. 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.

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 have in the past almost always been shorter and less punishing than the 'primary' bull markets were rewarding. Each bear market has rarely (if ever) wiped out the real (inflation adjusted) gains of the previous bull markets, and the succeeding bull markets have usually made up for the real losses of any previous bear markets. This is one of the reasons why a secular market trend may be said to encompass the primary trends within it. The United States was described as being in a secular bull market from about 1983 to late 2007, with brief upsets including the crash of 1987 and the dot-com bust of 2000–2002.

In a secular bear market, the 'primary' bull markets are sometimes shorter than the 'primary' bear markets and rarely compensate for the real losses of the 'primary' bear markets occurring during this extended cycle. For example, in 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 a slow nature, thereby allowing inflation to keep housing prices steady.) Another example of a secular bear market was seen in gold during the period between January 1980 to June 1999. During this period the nominal gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g),[6] and became part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period (~1982–2000).

Market events

Main articles: Stock market crash and Stock market bubble

An exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a market crash associated with a recession. An exaggerated bull market, on the other hand, fueled by overconfidence and/or speculation can lead to a market bubble — characterized by an extreme inflation of the price/earnings P/E ratios of the stocks in that market.

Cause of market events

Market movements may respond to new information becoming available to the market, but may also be influenced by investors' cognitive biases and emotional biases. Expectations play a large part in financial markets. Often there will be significant price reaction to financial data, information or news. Unexpected news or information that is perceived as positive for the economy or for a particular market sector or company will of course increase stock prices, and vice versa. Some behavioral finance studies (Richard Thaler) also point to the impact of the underreaction-adjustment-overreaction process in the formation of market movements and trends.

Technical analysis

Main article: Technical analysis

Many investors and analysts use technical analysis to try to identify whether a market or security is likely to increase or decrease in value. They then generate trading strategies to exploit their conclusions and market insights. Some technical analysts believe that the financial markets are cyclical and move in and out of bull and bear market phases on a regular and consistent basis.

Etymology

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Please help improve this section by adding citations to reliable sources. Unverifiable material may be challenged and removed. (October 2008)

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".

The most common etymology points to London bearskin "jobbers" (market makers),[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.

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.[citation needed]

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 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.
  • The word "bull" plays off the market's returns being "full" whereas "bear" alludes to the market's returns being "bare".

Historic examples

See also

References

  1. ^ http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
  2. ^ A random walk down Wall Street : the time-tested strategy for successful investing [WorldCat.org}
  3. ^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), p. 2.
  4. ^ "Staying calm during a bear market". Vanguard Group.
  5. ^ Technical Analysis of Stock Trends, Robert D. Edwards and John Magee p. 479
  6. ^ Chart of gold 1968–99

External links


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