In investing Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to earn income or profit, financial markets In economics, a financial market is a mechanism that allows people to easily buy and sell financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis are commonly believed to have market trends that can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). This belief is generally consistent with the non-scientific practice of technical analysis Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts may employ models and trading rules based and broadly inconsistent with the standard academic view of financial markets, the efficient market hypothesis In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient", or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and instantly change to reflect new information. Therefore it is impossible to consistently outperform the market by using. ^[1] The belief in trends incorporates the idea that market cycles There are many types of business cycles. Some of the most common ones are those that impact the stock market. In his book The Next Great Bubble Boom, Harry S. Dent Jr., a Harvard graduate and Fortune 100 consultant, outlines several cycles that have specific relevance to the stock market. . Some of these cycles have been quantitatively examined occur with regularity and persistence.

The assumption that market prices move in trends is one of the major components of technical analysis Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts may employ models and trading rules based,^[2] and consideration of market trends is common to many Wall Street Wall Street is a street in Lower Manhattan, New York City, New York, United States. It runs east from Broadway to South Street on the East River, through the historical center of the Financial District. It is the first permanent home of the New York Stock Exchange; over time Wall Street became the name of the surrounding geographic neighborhood 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 gold," or "bearish on technology stocks", etc).

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 A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor. Conversely, a capital loss arises if the proceeds from the sale of a. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd Herd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks, and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, episodes of mob violence and even everyday decision. 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 Dow Theory is a heterodox theory on stock price movements that includes what is now called technical analysis as well as some portion of sector rotation. The theory was derived from 255 Wall Street Journal editorials written by Charles H. Dow , journalist, founder and first editor of the Wall Street Journal and co-founder of Dow Jones and Company attempts to describe the character of these market movements.

India's Bombay Stock Exchange The Bombay/Mumbai Stock Exchange Limited (formerly, The Stock Exchange, Mumbai; popularly called The Bombay/Mumbai Stock Exchange, or BSE) has the greatest number of listed companies in the world, with 4700 listed as of August 2007. It is located at Dalal Street, Mumbai, India. On 31 December 2007, the equity market capitalization of the companies Index, SENSEX BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30 stocks started in 01 of jan, 1986. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around one-fifth of the market capitalization of the BSE. The, was in a bull run for almost five years from April 2003 to January 2008 as it increased from 2,900 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 a steady drop in the stock market over a period of time.^[3] It 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 A virtuous circle or a vicious circle is a complex of events that reinforces itself through a feedback loop. A virtuous circle has favorable results, and a vicious circle has detrimental results. A virtuous circle can transform into a vicious circle if eventual negative feedback is ignored.

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 Vanguard is a United States investment management company that manages approximately $1 trillion in assets, based in Malvern, Pennsylvania. It offers mutual funds and other financial products and services to individual and institutional investors in the United States and abroad. Founder and former chairman John C. Bogle is credited with the, "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]

Historic bear markets

The most famous bear market in history followed the Wall Street Crash of 1929 Four phases—Black Thursday, Black Friday, then Black Monday, and Black Tuesday—are commonly used to describe this collapse of stock values. All four are appropriate, for the crash was not a one-day affair. The initial crash occurred on Thursday, October 24, 1929, but the catastrophic downturn of Monday, October 28 and Tuesday, October 29 and erased 89% (from 386 to 40) of market capitalization by July 1932, marking the start of the Great Depression The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. It was the largest and most severe economic depression in the 20th century, and is used in the 21st century as an example of how far the world's economy can decline. The Great. After slowly regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. A milder, low-level, long-term bear market occurred from about 1973 to 1982, encompassing the stagflation Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time. The portmanteau stagflation is generally attributed to British politician Iain Macleod, who coined the term in a speech to Parliament in 1965. The concept is notable partly because, in postwar of U.S. economy, the 1970s energy crisis, and the high unemployment of the early 1980s.

A notable bear market occurred between about March 2000 and October 2002. Another one occurred between about October 2007 and March 2009. A rise of around 40% happened between early March 2009 and early May 2009 leading to the usual arguments.

Market bottom

A stock market bottom is a trend reversal - the end of a market downturn and the beginning of an upward moving trend. "Bottom" is more than just a recent low in a stock market index, but a reversal of the primary trend. A "bottom" may occur because of the presence of a "cycle," or because of "panic selling" as a reaction to an adverse financial development.

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.

Some of the more notable market bottoms, in terms of the closing values of the Dow Jones Industrial Average (DJIA The Dow Jones Industrial Average also referred to as the Industrial Average, the Dow Jones, the Dow 30, or simply as the Dow; is one of several stock market indices, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. The average is named after Dow and one of his business associates, Edward Jones. It is an) include:

• Black Monday: The DJIA hit a bottom at 1738.74 on 10/19/1987, as a result of the decline from 2722.41 on 8/25/1987 (Chart ^[5]).
• The bursting of the Dot-com bubble The "dot-com bubble" was a speculative bubble covering roughly 1998–2001 (with a climax on March 10, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields: A bottom of 7286.27 was reached on the DJIA on 10/9/2002 as a result of the decline from 11722.98 on 1/14/2000. This included an intermediate bottom of 8235.81 on 9/21/2001 which led to an intermediate top of 10635.25 on 3/19/2002 (Chart ^[6]). The "tech-heavy" Nasdaq fell a more precipitous 79% from its 5132 peak (3/10/2000) to its 1108 bottom (10/10/2002).

• A decline associated with the Subprime mortgage crisis The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed starting at 14164.41 on 10/9/2007 (DJIA) and caused a short term bottom of 11740.15 on 3/10/2008. After a rallying to a temporary top on 5/2/2008 at 13058.20 the primary trend of the declining, "bear" market, resumed. (Chart ^[7]).

Baron Rothschild Baron Rothschild, of Tring in the County of Hertford, is a title in the Peerage of the United Kingdom. It was created in 1885 for Sir Nathan Rothschild, 2nd Baronet, a member of the Rothschild banking family. He was the first person of the Jewish faith to be raised to the peerage 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^[8].

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.^[9] 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 rally is a period of sustained increases in the prices of stocks, bonds or indexes. This type of price movement can happen during either a bull or a bear market, when it is known as either a bull market rally or a bear market rally, respectively. However, a rally will generally follow a period of flat or declining prices. 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 The Dow Jones Industrial Average is one of several stock market indices, created by nineteenth-century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is an index that shows how certain stocks have traded. Dow compiled the index to gauge the performance of the industrial sector of the American stock market. It is 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 Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, People's Republic of China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south. The characters which make up Japan's name mean "sun-origin", which 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 2000 (or 2007), with brief upsets including the crash of 1987 In finance, Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones and the dot-com bust The "dot-com bubble" was a speculative bubble covering roughly 1998–2001 (with a climax on March 10, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields 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 Gold is a chemical element with the symbol Au (Latin: aurum) and an atomic number of 79. It has been a highly sought-after precious metal in jewelry, in sculpture, and for ornamentation since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is dense, soft, shiny and the most 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),^[10] and became part of the Great Commodities Depression The Late-twentieth century commodity prices discusses the steep or generally low commodity prices between 1980 and 2000, both in real and nominal terms. The S&P 500 The S&P 500 is a value weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market companies; the NYSE Euronext and the NASDAQ OMX experienced a secular bull market over a similar time period (~1982–2000).

Market events

An exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a market crash A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles associated with a recession In economics, a recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product , employment, investment spending, capacity utilization, household incomes and business. By contrast, an exaggerated bull market fueled by overconfidence and / or speculation can lead to a market bubble A stock market bubble is a type of economic bubble taking place in stock markets when price of stocks rise and become overvalued by any measure of stock valuation — characterized by an extreme inflation of the price / earnings P/E The P/E ratio of a stock (also called its "P/E", "PER", "earnings multiple," or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are 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 A cognitive bias is a person's tendency to make errors in judgment based on cognitive factors, and is a phenomenon studied in cognitive science and social psychology. Forms of cognitive bias include errors in statistical judgment, social attribution, and memory that are common to all human beings. Such biases drastically skew the reliability of and emotional biases Those factors can be either individual and self-centered, or linked to interpersonal relationship or to group influence. 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 Behavioral economics and behavioral finance are closely related fields that have evolved to be a separate branch of economic and financial analysis which applies scientific research on human and social, cognitive and emotional factors to better understand economic decisions by consumers, borrowers, investors, and how they affect market prices, studies (Richard Thaler Richard H. Thaler is an American economist. He is perhaps best known as a theorist in behavioral finance, and for his collaboration with Daniel Kahneman and others in further defining that field) also point to the impact of the underreaction-adjustment-overreaction process in the formation of market movements and trends.

Technical analysis

Many investors and analysts use technical analysis Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts may employ models and trading rules based 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

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.^[11]

One hypothetical etymology For languages with a long written history, etymologists make use of texts in these languages, and texts about the languages, to gather knowledge about how words were used at earlier stages, and when they entered the languages in question. Etymologists also apply the methods of comparative linguistics to reconstruct information about languages that points to London London is the capital of England and the United Kingdom. It has been an influential city for two millennia and its history goes back to its founding by the Romans. The city's core, the ancient City of London, still retains its limited medieval boundaries. However, since at least the nineteenth century, the name "London" has also referred bearskin Bears are mammals of the family Ursidae. Bears are classified as caniforms, or doglike carnivorans, with the pinnipeds being their closest living relatives. Although there are only eight living species of bear, they are widespread, appearing in a wide variety of habitats throughout the Northern Hemisphere and partially in the Southern Hemisphere "jobbers" (market makers In foreign exchange trading, where most deals are conducted over-the-counter and are, therefore, completely virtual, the market maker sells to and buys from its clients. Hence, the client's loss and the spread is the market-maker firm's profit, which gets thus compensated for the effort of providing liquidity in a competitive market. This extra),^{[citation needed]} who would sell bearskins before the bears had actually been caught in contradiction of the proverb A proverb , also called a byword or nayword, is a simple and concrete saying popularly known and repeated, which expresses a truth, based on common sense or the practical experience of humanity. They are often metaphorical. A proverb that describes a basic rule of conduct may also be known as a maxim. If a proverb is distinguished by particularly 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 The South Sea Company was a British joint stock company that traded in South America during the 18th century. Founded in 1711, the company was granted a monopoly to trade in Spain's South American colonies as part of a treaty during the War of Spanish Succession. In return, the company assumed the national debt England had incurred during the war of 1721, the bear was also associated with short selling In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the assets, when he will pay less to repurchase the assets than he; 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 A mnemonic device is a memory and/or learning aid. Commonly met mnemonics are often verbal, something such as a very short poem or a special word used to help a person remember something, particularly lists, but may be visual, kinesthetic or auditory. Mnemonics rely on associations between easy-to-remember constructs which can be related back to 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 Bear-baiting was popular in England until the nineteenth century. From the sixteenth century, many herds of bears were maintained for baiting. In its best-known form, arenas for this purpose were called bear-gardens, consisting of a circular high fenced area, the "pit", and raised seating for spectators. A post would be set in the ground 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 thought of as lazy and cautious movers -- a misconception because a bear, under the right conditions, can outrun a horse. ^[12]
• 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

• The Crash of 1929 was an end to the bull market that existed throughout the 1920s.
• 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 September 11, 2001 correction.
• The stock market downturn of 2002.

See also

• Business cycle
• Trend following

References

1. ^ http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
2. ^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), p. 2.
3. ^ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in Action. Pearson Prentice Hall. p. 290. ISBN 0-13-063085-3.
4. ^ "Staying calm during a bear market". Vanguard Group.
5. ^ http://stockcharts.com/h-sc/ui?s=$INDU&p=D&st=1987-08-01&en=1987-12-31&id=p95907824619 stockcharts.com chart
6. ^ http://stockcharts.com/h-sc/ui?s=$INDU&p=D&st=2000-01-01&en=2002-12-31&id=p94927308656 stockcharts.com chart
7. ^ http://stockcharts.com/h-sc/ui?s=$INDU&p=D&st=2007-06-01&en=2008-12-31&id=p30570128154 stockcharts.com chart
8. ^ http://www.fool.com/investing/small-cap/2007/05/02/buy-when-theres-blood-in-the-streets.aspx Buy When There's Blood in the Streets
9. ^ Technical Analysis of Stock Trends, Robert D. Edwards and John Magee p. 479
10. ^ Chart of gold 1968–99
11. ^ Harper, Douglas. "bull". Online Etymology Dictionary. http://www.etymonline.com/index.php?term=bull.
12. ^ "The Speed Of Grizzly Bears" William E. Kearns, Assistant Park Naturalist

External links

• Market trend definition, explanations, and examples provided in simple terms
• Braze, David. What Is a Bear Market? The Motley Fool.

Categories: Market trends | Financial markets | Financial economics | Investment | Behavioral finance

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• Market Trends
• Category:Market Trends
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