When being on the right
side of a market trend means the difference between making a profit or loss,
then survival for the trader/investor is pretty much based on his/her ability
to understand and analyze market trends with the aim of successfully forecasting
future price movements in the market.
So let’s start with few
definitions; a trend in the financial markets has been defined as the tendency
for prices to move in one direction over a period of time. Price movements can
either be upwards, which is known as a bull market, or conversely they can be
downwards in a given time frame, this is known as a bear market.
Financial market trends can
be secular, which is defined as a long time frame, typically spanning over a 5
to 25 year period. Secular markets can also be bullish and bearish. A historic
example of a secular market was during the Great Depression, which lasted
between 1929 to WWII. This period could be accurately referred to as a bearish
secular market, which was a period when stock market prices moved downwards.
Since secular markets have
relatively long time spans, a period of 5 to 25 years, it is not surprising
then for secular markets to also consist of a number of primary trends, which
is a period typically lasting for a year or longer and has the wide support of
all sectors. Primary trends can consist of either upward movement in
prices, bullish or downward movements in price, bearish.
Therefore, a secular bear
market consists of small bull markets and larger bear markets. Conversely, a
secular bull market consists of large bull markets and smaller bear markets;
the rationale being that the prevailing trend in a secular bull market is
upwards or “bullish” as often referred to by market commentators. During the
period 1983-2001 the Dow was in a secular bull market, but it also consisted of
two primary bear trends; the 1987 stock market crash and the market collapse of
2000-2002 triggered by the dotcom bubble.
But sometimes this trend
can be less than a one year period, lasting only weeks. This type of trend is
referred to as a secondary market trend, which can be defined as short term
price changes in primary markets with a duration of just a few weeks. A
secondary bull market is often colorfully described by traders as a “dead cat
bounce,” which is a brief and significant recovery in prices after steep
declines. Its origins come from the notion that even a cat would bounce from a
significant height if it were dropped. (My apologies to the feline lovers among
you).
Onto a few more definitions;
a market top as the name suggests is when prices have reached their highest
point for a period of usually a few years and then decline, albeit small
declines initially, which then picks up momentum with the passage of time,
similar to a snowball rolling down the mountain. Conversely, a
market bottom is the opposite. There is a trend reversal, the end of a market
downturn, and it precedes the start of an upward moving trend (bull market.)
Indeed, bottom picking (identifying the market bottom) can be a difficult call
but it can be quite rewarding if you get it right.
A frequent question asked
by those new to the market is why market participants and commentators assign
two symbolic beasts; the bull and the bear to define certain trends and moods.
Moreover, why do the world’s largest exchanges have statues of these two
symbolic beasts appearing outside their exchange? For example the
New York and Frankfurt Exchanges both have statues of the bull and bear outside
their exchanges. While nobody is definitely certain about the symbolic origins
of the bull and the bear, there are, however, a number of thoughts.
One view is that the
symbolisms may have originated by observing the distinct fighting styles of the
two beats. For example, when fighting off an adversary the bull charges,
bucking its horns in a rapid upward motion. Perhaps it is this upward bucking
motion of the bull’s horn that has come to symbolize an upward market and the
bulls charge forward fearlessly represents-optimism i.e. “a bull run.” By contract
a bear attacks its opponent with its paws lashing out in a downward motion,
symbolizing prices moving downwards in a market and it can also squeeze an
opponent to death. “A bear squeeze,” which is when a trader is
holding a short position, the price is appreciating, losses are mounting and
the trader is forced, or squeezed out of his
position. Another view is that these symbolisms
originated from their linguistic sounds. Indeed, the term may have its origins
from two old English banking or Stock broking families, known as the Baring and
the Bulteels. The Baring’s family tended to be more cautions with
their investment decision, while the Bulteels where more optimistic and bullish
view on stocks. Ironically, it was the former bank that was brought down in
1995 do to derivative trades, which went horribly wrong.
Other believes that the
symbolisms originated from a tongue in cheek tale way back in the 1700 century
when a distinguished gentleman of army ranking major, wanted to buy himself a
promotion, so he speculated by selling some stock short. When the
transaction went wrong, the story goes on, the major described his fellow
officer as a bear-skin man.
Finally, after defining
briefly various trends and looking at the symbolisms of the market. A
reasonable question might be to ask whether, since the 2008 financial collapse,
we are currently in a secular bear market and if this current bull market is a
primary trend? “I can calculate the movements of heavenly bodies, but not the
insanity of men,” Isaac Newton. I think it’s time for me to walk the dog.
Darren Winters
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