(Redirected from Bear markets)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,
[John J. Murphy, ''Technical Analysis of the Financial Markets'' (New York Institute of Finance, 1999), p. 2.] and the description of market trends is common to
Wall Street,
[2]
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
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.
[3]
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.
[4] 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,
[5] which formed part of the
Great Commodities Depression. The
S&P 500 experienced a secular bull market over a similar time period.
[6]
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.
Market events
Main articles: Stock market crash,
Stock market bubble
An exaggerated bull market fueled by overconfidence and/or speculation can lead to a
stock market bubble. At the other extreme, an exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a
stock market crash and a
recession.
Causes
Both bull and bear markets may be fuelled by sound economic considerations and/or by speculation and/or investors'
cognitive biases and
emotional biases.
Expectations play a large part in financial markets and in the changes from bull to bear environments. More precisely, attention should be paid to reactions to information, chiefly positive surprises and negative surprises. The tendency is for positive surprises to fuel a bull market (when the news continually tends to exceed investor's expectations) and negative surprises tend to feed a bear market (with expectations disappointed). Also, some
behavioral finance studies (
Richard Thaler) show the role of the
underreaction-adjustment-overreaction process in the formation of market trends.
Technical analysis
Main articles: Technical analysis
Many investors and analysts use
technical analysis to try to identify whether a market or security is in a bull or bear phase, and to generate trading strategies to exploit the trend. Technical analysts believe that financial markets are cyclical and move in and out of bull and bear market phases regularly.
Etymology
The precise origin of the phrases "bull market" and "bear market" is obscure. The ''Oxford English Dictionary'' cites an 1891 use of the term "bull market", while other sources put the first use of the term much earlier, in 1859.
[7]
The most common
etymology points to
London bearskin "jobbers" (brokers), 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.
Some analogies that have been drawn, but are likely
false etymologies:
★ 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 with its horns from bottom up; a bear attacks with its paw from above, downward.
★ 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.
★ Bears keep their chin up, while Bulls keep their chin down.
★ Bear neck points down while Bull's points upwards.
★ The word "bull" plays off the market's return's being "full" whereas "bear" alludes to the market's returns being "bare".
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. In a falling market, the counterparties--the "bearers" of the commmodity to be delivered, win because they have locked in a price higher than the present for future delivery.
Historic examples
★ The
Crash of 1929 was an end result to the bull market that existed throughout the 1920's.
★ 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
stock market downturn of 2002.
★ In May 2006, emerging markets including India witnessed a correction. Indices fell as much as 20% before resuming the secular Bull Run.
Notes
1. Investorswords.com, retrieved 30 May 2007.
2. New York Stock Exchange (NYSE Info Tools), retrieved 30 May 2006.
3. http://finance.yahoo.com/charts#chart2:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
4. http://finance.yahoo.com/charts#chart2:symbol=^dji;range=my;indicator=volume;charttype=line;crosshair=on;logscale=on;source=undefined
5. http://www.kitco.com/LFgif/au968-999.gif
6. http://finance.yahoo.com/q/bc?s=%5EGSPC&t=my&l=off&z=l&q=l&c=
7. Bull Market, retrieved 13 Aug 2007.
See also
★
Business cycle
★
Financial markets
★
List of finance topics
★
Stock market
★
Technical analysis
★
Trend following
★
Keynesian beauty contest
External links
★
Slope Of Hope bear market blog
★ Braze, David. ''
What Is a Bear Market?''
The Motley Fool.
★
Telegraph Investment Column
★
Current Market Valuations
★
GoldMau.com - Market Analysis and Investor Information
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