Financial Markets
Financial markets function to transfer capital between buyers and sellers and provide corporations and individuals with sources of investing and raising funds. In this section, you will get to know the types of financial markets in the US economy and their role in corporate governance.
Trends in Markets
A market trend is a putative tendency of a financial market to move in a particular direction over time.
LEARNING OBJECTIVE
- Define different types of market trends
KEY POINTS
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.
A secular market trend is a long-term trend that lasts 5 to 25 years and consists of a series of primary trends.
A primary trend has broad support throughout the entire market and lasts for a year or more.
There are also trends in new ways of transacting in financial markets, for example electronic trading innovations. Algorithmic trading allows trading orders to be entered with an algorithm deciding on aspects of the order. Stock market data systems have also changed drastically over the years.
Additionally, new markets are emerging, such as private secondary markets allowing trading of unregistered and private company securities.
TERM
- putative
Commonly believed or deemed to be the case; accepted by supposition rather than as a result of proof.
A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long-term frames, primary for medium-term frames, and secondary for short-term frames. Traders identify market trends using technical analysis, a framework which characterizes market trends as predictable price tendencies when price reaches support and resistance levels, varying over time.
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.
Secular Market Trend
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, while 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, with brief upsets including the crash of 1987 and the dot-com bust of 2000 to 2002.
In a secular bear market, the prevailing trend is "bearish" or downward-moving. An example of a secular bear market was seen in gold during the period between January 1980 to June 1999, culminating with the Brown Bottom. During this period, the nominal gold price fell from a high of to a low of , and became part of the Great Commodities Depression.
Primary Market Trend
A primary trend has broad support throughout the entire market and lasts for a year or more.
Bull Market
Bear Market
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".
Market Top
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. A decline then follows, usually gradually at first and later with more rapidity. William J. O'Neil and company reported 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.
Market Bottom
A market bottom is a trend reversal, the end of a market downturn, and precedes the beginning of an upward moving trend (bull market).
It is very difficult to identify a bottom 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 during a misperceived or "false" market bottom.