A market trend is a perceived tendency of financial markets to move in a particular direction over time. These trends are classified 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, a framework which characterizes market trends as predictable price tendencies within the market when price reaches support and resistance levels, varying over time.
A trend can only be determined in hindsight, since at any time prices in the future are not known.
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 names perhaps correspond to the fact that a bull attacks by lifting its horns upward, while a bear strikes with its claws in a downward motion.
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 the crash of 1987 and the market collapse of 2000-2002 triggered by the dot-com bubble.
In a secular bear market, the prevailing trend is "bearish" or downward-moving. An example of a secular bear market occurred in gold between January 1980 to June 1999, culminating with the Brown Bottom. During this period the nominal gold price fell from a high of $850/oz ($30/g) to a low of $253/oz ($9/g), and became part of the Great Commodities Depression.
A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more.
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, or earlier.
An analysis of Morningstar, Inc. 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%.
A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism. 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."
An analysis of Morningstar, Inc. stock market data from 1926 to 2014 found that a typical bear market "lasted 1.3 years with an average cumulative loss of -41%", while annualized declines for bear markets range from -19.7% to -47%.
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 retroactively defined as market participants are not aware of it as it happens. A decline then follows, usually gradually at first and later with more rapidity. William J. O'Neil and company report that since the 1950s a market top is characterized by three to five distribution days in a major market index occurring within a relatively short period of time. Distribution is a decline in price with higher volume than the preceding session.
A recent peak for the broad U.S. market was October 9, 2007. The S&P 500 index closed at 1,565 and the Nasdaq at 2861.50.
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 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.
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.
Secondary trends are short-term changes in price direction within a primary trend. The duration is a few weeks or a few months.
One type of secondary market trend is called a market correction. A correction is a short term price decline of 5% to 20% or so. An example occurred from April to June 2010, when the S&P 500 went from above 1200 to near 1000; this was hailed as the end of the bull market and start of a bear market, but it was not, and the market turned back up. A correction is a downward movement that is not large enough to be a bear market (ex post).
Another type of secondary trend is called a bear market rally (sometimes called "sucker's rally" or "dead cat bounce") which consist of a market price increase of only 10% or 20% and then the prevailing, bear market trend resumes. 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 225 has been typified by a number of bear market rallies since the late 1980s while experiencing an overall long-term downward trend.
The price of assets such as stocks is set by supply and demand. By definition, the market balances buyers and sellers, so it's impossible to literally have 'more buyers than sellers' or vice versa, although that is a common expression. For 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. For a surge in supply, the opposite happens.
Supply and demand are created when investors shift allocation of investment between asset types. For example, at one time, investors may move money from government bonds to "tech" stocks; at another time, they may move money from "tech" stocks to government bonds. In each case, this will affect the price of both types of assets.
Generally, investors try to follow a buy-low, sell-high strategy but often mistakenly 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 loop and prices will be unstable. This can be seen in a bubble or crash.
Investor sentiment is a contrarian stock market indicator.
When a 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. The predictive capability of such a signal (see also market sentiment) is thought to be highest when investor sentiment reaches extreme values. Indicators that measure investor sentiment may include:
David Hirshleifer sees in the trend phenomenon a path starting with underreaction and ending in overreaction by investors / traders.