A market trend is a perceived tendency of
financial market
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
s to move in a particular direction over time.
Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time-frames.
Traders attempt to identify market trends using
technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
, a framework which characterizes market trends as predictable price tendencies within the market when price reaches
support and resistance levels, varying over time.
A market trend can only be determined in hindsight, since at any time prices in the future are not known.
Market terminology
![Bulle und Bär Frankfurt](https://upload.wikimedia.org/wikipedia/commons/4/45/Bulle_und_B%C3%A4r_Frankfurt.jpg)
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.
[ The terms come from London's ]Exchange Alley
Exchange Alley or Change Alley is a narrow alleyway connecting shops and coffeehouses in an old neighbourhood of the City of London. It served as a convenient shortcut from the Royal Exchange on Cornhill to the Post Office on Lombard Street ...
in the early 18th century, where traders who engaged in naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deli ...
were called "bear-skin jobbers" because they sold a bear's skin (the shares) before catching the bear. This was simplified to "bears," while traders who bought shares on credit were called "bulls." The latter term might have originated by analogy to bear-baiting
Bear-baiting is a blood sport in which a chained bear and one or more dogs are forced to fight one another. It may also involve pitting a bear against another animal.
History Europe Great Britain
Bear-baiting was very popular from the 12th ...
and bull-baiting
Bull-baiting is a blood sport involving pitting a bull against dogs.
History England
Crowds in London during the Royal Entry of James VI and I in March 1604 were entertained by bull-baiting. During the time of Queen Anne, bull-baiting was p ...
, two animal fighting sports of the time. Thomas Mortimer
Sir Thomas Mortimer (c. 1350–1399) was a medieval English soldier and statesman who served briefly in several important administrative and judicial state offices in Ireland and played a part in the opposition to the government of King Richard ...
recorded both terms in his 1761 book '' Every Man His Own Broker''. He remarked that bulls who bought in excess of present demand might be seen wandering among brokers' offices moaning for a buyer, while bears rushed about devouring any shares they could find to close their short positions. An unrelated folk etymology
Folk etymology (also known as popular etymology, analogical reformation, reanalysis, morphological reanalysis or etymological reinterpretation) is a change in a word or phrase resulting from the replacement of an unfamiliar form by a more famili ...
supposes that the terms refer to a bear clawing downward to attack and a bull bucking upward with its horns.
Secular trends
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 Black Monday
Black Monday refers to specific Mondays when undesirable or turbulent events have occurred. It has been used to designate massacres, military battles, and stock market crashes.
Historic events
*1209, Dublin – when a group of 500 recently arriv ...
and the Stock market downturn of 2002
In 2001, stock prices took a sharp downturn (some say "stock market crash" or " the Internet bubble bursting") in stock markets across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 attac ...
triggered by the crash of the dot-com bubble
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compo ...
. Another example is the 2000s commodities boom.
In a secular bear market, the prevailing trend is "bearish" or downward-moving. An example of a secular bear market occurred in gold
Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile met ...
between January 1980 to June 1999, culminating with the Brown Bottom
Brown is a color. It can be considered a composite color, but it is mainly a darker shade of orange. In the CMYK color model used in printing or painting, brown is usually made by combining the colors orange and black. In the RGB color model use ...
. During this period the market gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g). The stock market was also described as being in a secular bear market from 1929 to 1949.
Primary trends
A primary trend has broad support throughout the entire market (most sectors
Sector may refer to:
Places
* Sector, West Virginia, U.S.
Geometry
* Circular sector, the portion of a disc enclosed by two radii and a circular arc
* Hyperbolic sector, a region enclosed by two radii and a hyperbolic arc
* Spherical sector, a p ...
) and lasts for a year or more.
Bull market
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, as the bull runs its course. This often leads the economic cycle, for example in a full recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
, or earlier.
Generally, bull markets begin when stocks rise 20% from their low, and end when stocks drawdown 20%. However, some analysts suggest a bull market cannot happen within a bear market.
An analysis of Morningstar, Inc.
Morningstar, Inc. is an American financial services firm headquartered in Chicago, Illinois and was founded by Joe Mansueto in 1984. It provides an array of investment research and investment management services.
With operations in 29 countries, ...
stock market data from 1926 to 2014 found that a typical bull market lasted 8.5 years
with an average cumulative total return of 458%, while annualized gains for bull markets range from 14.9% to 34.1%.
Examples
:India's Bombay Stock Exchange
BSE Limited, also known as the Bombay Stock Exchange (BSE), is an Indian stock exchange. It is located on Dalal Street in Mumbai. Established in 1875 by cotton merchant Premchand Roychand, a Jain businessman, it is the oldest stock exchange in ...
Index, BSE SENSEX
The BSE SENSEX (also known as the S&P Bombay Stock Exchange Sensitive Index or simply SENSEX) is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange. The 30 ...
, had a major bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points, more than a 600% return in 5 years.
: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 Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
, the end of the later time periods were mostly periods of soft landing Soft landing may refer to:
*Soft landing (aeronautics)
A soft landing is any type of aircraft, rocket or spacecraft landing that does not result in significant damage to or destruction of the vehicle or its payload, as opposed to a hard la ...
, which became large bear markets. (see: Recession of 1960–61
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
and the dot-com bubble
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compo ...
in 2000–2001)
Bear market
A bear market is a general decline in the stock market over a period of time. It includes a transition from high investor optimism to widespread investor fear and pessimism. One generally accepted measure of a bear market is a price decline of 20% or more over at least a two-month period.
A smaller decline of 10 to 20% is considered a correction
Correction may refer to:
* A euphemism for punishment
* Correction (newspaper), the posting of a notice of a mistake in a past issue of a newspaper
* Correction (stock market), in financial markets, a short-term price decline
* Correction (novel), ...
.
Bear markets end when stocks recover, attaining new highs. The bear market, then, is measured retrospectively from the recent highs to the lowest closing price, and its recovery period is the lowest closing price to new highs. Another commonly accepted end to a bear market is indices gaining of 20% from their low.
From 1926 to 2014, the average bear market lasted 13 months
with an average cumulative loss of 30%, while annualized declines for bear markets ranged from −19.7% to −47%.
Examples
Some examples of a bear market include:
* The Wall Street Crash of 1929
The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
, which erased 89% (from 386 to 40) of the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity inde ...
's market capitalization by July 1932, marking the start of the Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. 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.
* A long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis
The 1970s energy crisis occurred when the Western world, particularly the United States, Canada, Western Europe, Australia, and New Zealand, faced substantial petroleum shortages as well as elevated prices. The two worst crises of this period wer ...
and the high unemployment of the early 1980s.
* A bear market occurred in India following the 1992 Indian Stock Market scam.
* The Stock market downturn of 2002
In 2001, stock prices took a sharp downturn (some say "stock market crash" or " the Internet bubble bursting") in stock markets across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 attac ...
.
* As a result of the financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
, a bear market occurred between October 2007 and March 2009.
* The 2015 Chinese stock market crash
Fifteen or 15 may refer to:
*15 (number), the natural number following 14 and preceding 16
*one of the years 15 BC, AD 15, 1915, 2015
Music
* Fifteen (band), a punk rock band
Albums
* ''15'' (Buckcherry album), 2005
* ''15'' (Ani Lorak alb ...
.
* In early 2020, as a result of the COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identif ...
, multiple stock market crashes
A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often fol ...
have led to bear markets across the world.
* In 2022, concerns over an inflation surge and potential rises of the federal funds rate
In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis. Reserve balances a ...
caused a bear market.
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 identified retrospectively, as market participants are not aware of it at the time it happens. Thus prices subsequently fall, either slowly or more rapidly.
William O'Neil reported that, since the 1950s, a market top is characterized by three to five distribution days in a major stock market index
In finance, a stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current stock price levels with past prices to calculate market performance.
Two of the ...
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
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compo ...
(as measured by the NASDAQ-100
The Nasdaq-100 (^NDX) is a stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index. The stocks' weights in the in ...
) occurred on March 24, 2000. The index closed at 4,704.73. The NASDAQ peaked at 5,132.50 and the S&P 500 Index
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
at 1525.20.
The peak for the U.S. stock market before the financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
was on October 9, 2007. The S&P 500 Index
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of D ...
closed at 1,565 and the NASDAQ at 2861.50.
Market bottom
A market bottom is a trend reversal, the end of a market downturn, and the beginning of an upward moving trend (bull market).
It is very difficult to identify a bottom (referred to as "bottom picking") before it passes. The upturn following a decline may be 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
Baron Rothschild, of Tring in the County of Hertfordshire, 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 Jewish mem ...
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 more examples of market bottoms, in terms of the closing values of the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity inde ...
(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
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the Financial crisis of 2007–2008, 2007–2008 global financial crisis. It was triggered by a large decline ...
starting at 14164.41 on 9 October 2007 (chart).
Secondary trends
Secondary trends are short-term changes in price direction within a primary trend. They may last for a few weeks or a few months.
Bear market rally
Similarly, a bear market rally
Rally or rallye may refer to:
Gatherings
* Demonstration (political), a political rally, a political demonstration of support or protest, march, or parade
* Pep rally, an event held at a United States school or college sporting event
Sport ...
(sometimes called "sucker's rally" or "dead cat bounce
In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that "even a dead cat will bounce if it falls from a great height", the phrase, which originated on Wall Street, is also popularly ap ...
") is a price increase of 5% or more before prices fall again. Bear market rallies occurred in the Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity inde ...
index after the Wall Street Crash of 1929
The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange colla ...
, leading down to the market bottom in 1932, and throughout the late 1960s and early 1970s. The Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
ese Nikkei 225
The Nikkei 225, or , more commonly called the ''Nikkei'' or the ''Nikkei index'' (), is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the '' Nihon Keizai Shimbun'' (''The Nikkei'') newspaper since 1950 ...
has had several bear-market rallies between the 1980s and 2011, while experiencing an overall long-term downward trend.
Causes of market trends
The price of assets such as stocks is set by supply and demand. By definition, the market balances buyers and sellers, so it is impossible to have "more buyers than sellers" or vice versa, although that is a common expression. In 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. In a surge in supply, the opposite happens.
Supply and demand are varied when investors try to shift allocation of their investments between asset types. For example, at one time, investors may wish to move money from government bonds to "tech" stocks, but they will only succeed if somebody else is willing to buy government bonds from them; at another time, they may try to move money from "tech" stocks to government bonds. In each case, this will affect the price of both types of assets.
Ideally, investors would wish to use market timing
Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting fr ...
to buy low and sell high, but they may end up buying high and selling low. Contrarian investors and traders attempt to "fade" the investors' actions (buy when they are selling, sell when they are buying). A time when most investors are selling stocks is known as distribution, while a time when most investors are buying stocks is known as accumulation.
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 most assets but it often works in reverse for stocks due to the mistake many investors make of buying high in a state of euphoria and selling low in a state of fear or panic as a result of the herding instinct. 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
Negative feedback (or balancing feedback) occurs when some function (Mathematics), function of the output of a system, process, or mechanism is feedback, fed back in a manner that tends to reduce the fluctuations in the output, whether caused by ...
loop and prices will be unstable. This can be seen in a bubble or crash.
Market sentiment
Market sentiment
Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including ...
is a contrarian
A contrarian is a person who holds a contrary position, especially a position against the majority.
Investing
A contrarian investing style is based on identifying, and speculating against, movements in stock prices that reflect changes in t ...
stock market indicator.
When an extremely 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. David Hirshleifer
David Hirshleifer is an American economist. He is a professor of finance and currently holds the Merage chair in Business Growth at the University of California at Irvine. As of 2018 he became President-Elect of the American Finance Association ...
sees in the trend phenomenon a path starting with under-reaction and ending in overreaction by investors / traders.
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
The American Association of Individual Investors is a nonprofit organization with about 150,000 members whose purpose is to educate individual investors regarding stock market portfolios, financial planning, and retirement accounts. AAII "assists ...
(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
In finance the put/call ratio (or put-call ratio, PCR) is a technical indicator demonstrating investor sentiment. The ratio represents a proportion between all the put options and all the call options purchased on any given day. The put/call ratio ...
.
See also
* Animal spirits
* Black Monday
Black Monday refers to specific Mondays when undesirable or turbulent events have occurred. It has been used to designate massacres, military battles, and stock market crashes.
Historic events
*1209, Dublin – when a group of 500 recently arriv ...
* Bull-bear line
* Business cycle
Business cycles are intervals of Economic expansion, expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are ...
* Don't fight the tape
Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.
There are a number of different techniques, ...
* Economic expansion
An economic expansion is an increase in the level of economic activity, and of the goods and services available. It is a period of economic growth as measured by a rise in real GDP. The explanation of fluctuations in aggregate economic activity ...
* Herd mentality
Herd mentality, mob mentality or pack mentality describes how people can be influenced by their peers to adopt certain behaviors on a largely emotional, rather than rational, basis. When individuals are affected by mob mentality, they may make dif ...
* Market sentiment
Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including ...
* Mr. Market
Mr. Market is an allegory created by investor Benjamin Graham to describe what he believed were the irrational or contradictory traits of the stock market and the risks of following groupthink. Mr. Market was first introduced in his 1949 book, ''T ...
* Real estate trends
A real estate trend is any consistent pattern or change in the general direction of the real estate industry which, over the course of time, causes a statistically noticeable change. This phenomenon can be a result of the economy, a change in mortg ...
* Recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
* Trend following
Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.
There are a number of different techniques, ...
References
External links
Market trend definition, explanations, and examples provided in simple terms
{{Financial bubbles
Financial markets
Financial economics
Investment
Behavioral finance
Capitalism