How permanent are trends?

Wall Street's judgment has been influenced by past trends more than by any other single factor related to security values.

The avowed object of people in the market is to anticipate future developments, and the past is held to have no significance except as it aids in such anticipation.

Yet in practice it is almost the universal habit to base forecasts of future happenings on a projection of past trends.

This is notoriously true of both the professional's and the public's view of market prospects.

Nearly everyone is optimistic (or "bullish") because the market has been enjoying a spirited advance and pessimistic (or "bearish") after a decline.

In the same way, an industry or a company which has grown in the past is almost always expected to keep on progressing; those which have been on the downgrade are expected to get worse and worse.


Momentum

It is true that every established trend has a certain momentum, so that it is more likely to continue for at least a while longer than it is to reverse itself at the moment of observation.

But this is far from saying that any trend may be relied upon to continue long enough to create a profit for those who "get aboard."

Rather extensive studies which we have made of the subject lead us to conclude that reversals of trend in every part of the financial picture occur so frequently as to make reliance on a trend a particularly dangerous matter.  

There must be strong independent reasons for investing money on the expectation of a continuance of past tendencies, and the investor must beware lest his weighing of future probabilities be unduly influenced by the trend line of the past.

Can money be made on balance by following the trend of the general market?  This subject is too complicated and controversial to admit of our treating it her with out own selection of statistical evidence.

But it is appropriate to point out (a) that playing the trend is the standard formula of stock market trading by the general public and (b) that the general public loses money in the stock market.


Industrial groups

The public has a similar tendency to speculate in those industrial groups which have established the best market records in the recent past.  It is easy to show that this naive effort to exploit a historical trend is dangerous.

The trend of industry profits is no more reliable than that of industry prices.

Using earnings as a percentage of invested capital, between 1939 and 1947  we find that the average of the five best industries declined from 24.6% to 17.7%, whereas that of the five poorest advanced from 4.2% to 18.5%.

War conditions and their aftermath, of course, have played an important part in bringing about this extraordinary change in the relative position of prosperous and non-prosperous industries.

There are many unexpected reasons for the changed performance; the important thing is that performance trends do change and investment values with them.


Benjamin Graham
The Intelligent Investor

Market trend

Statues of the two symbolic beasts of finance (the bull and bear) in front of Frankfurt Stock Exchange.

Market trend

From Wikipedia, the free encyclopedia

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 gold," or "bearish on technology stocks", etc).

Contents[hide]
1 Primary market trends
1.1 Bull market
1.2 Bear market
1.3 Market bottom
2 Secondary market trends
3 Secular market trends
4 Market events
5 Cause of market events
6 Technical analysis
7 Etymology
8 Historic examples
9 See also
10 References
11 External links

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 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.[4] 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. The most famous bear market in history followed 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. Due to the current economic conditions (be it the steady decline in value of the market or the high unemployment rate) the United States of America is currently in a bear market. High ranking economic evaluators as well as upper end public officials have coined America's current situation as a "recession."

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."[5]

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 shortlived 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) 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 [6]).
The bursting of the Dot-com bubble: 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 [7]).
A decline associated with the Subprime mortgage crisis 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 [8]).

Baron Rothschild 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[9].

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.[10] 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 2000, 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),[11] 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. By contrast, an exaggerated bull market 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.

http://en.wikipedia.org/wiki/Market_trends

Also read:

What Is a Bear Market? http://www.fool.com/retirement/retireeport/2000/retireeport000717.htm