History has proven that investing in stocks yields more profits than most other investments. When an investor has money to invest, he needs to understand what the experts or analysts mean when they say bull market, bear market, or a correction. Understanding the meanings of different market trend expressions helps to plan personal strategies.
Paying attention to general market ups and downs produces better opportunities for the average investor and eliminates the risks of panicking when the stocks take a downward direction. Technical analyses of markets show that markets, in general, move in trends. Primary market trends are bull markets and bear markets. Secondary market trends are rallies and corrections.
When the buying of stocks outnumber their selling consistently, the market during that period of time is called a bull market. Also, investors or analysts who are optimistic on the markets’ performances are said to be bullish. An analyst may be bullish on one sector like the oil stocks and not so on technology stocks or he may be bullish on the general direction of all markets. A rise in the markets over a short time like a few days is called a bull market rally.
A bear market happens when the general markets show a sizeable drop over a long period of time; that is more than a few months. This may mean the investor confidence is broken and the selling is much more than the buying of stocks. After the Great Depression, a bear market lasted for two years, resulting in high unemployment.
Analysts and investors who become pessimistic and think that the markets indicate a falling trend are said to be bearish. A sudden drop in the markets over a short term is called a bear market rally.
Bear market rallies come about abruptly and may cause panic among the investors. If the panic and pessimism continues, this may lead to recession, which means a significant decline in the economic activity of an entire nation. This behavior of the investors may cause a general market crash, like the one in 1929 that led to the Great Depression with an international outcome. The 1929 Market Crash came about when the bull market that started in 1920 came to an end.
The international crash or the panic selling in 1987, called the Black Monday Crash, however, did not happen because of recession. Although no one is sure why it happened, it started after the falling of the US dollar and trade deficits.
A correction is quite different than a crash, because it takes place after a bull run and lasts for a short time. The drop is more than 10%, but less than 25%. The correction in the markets is an opportunity for the savvy investor to buy stocks at a lower price. On the other hand, thinking that a bear market is only a correction can lead to disappointment.
When a market trend stays over a longer period of time measurable in years, it is said to be secular. Secular bear markets take the prices of the stocks to even lower levels than when the bull markets started.
No reliable method exists to forecast the market trends before they happen. Analysts and economists draw fancy charts and try to connect the trends to one reason or another such as the value of dollar, world events, or politics; however, none of the predictors has been consistently correct.