The financial markets or stock markets function according to certain market trends and these are called
Stock Market Trends.
This opinion is supported by technical analysis, which is considered as an immature scientific application and is widely opposed by the efficient market hypothesis theory.
The technical analysis tries to find out whether the market or security is in a bull phase or bear phase and it produces strategic trading plans to take advantage of this phase. It believes that stock markets behave in a cyclical way which has two phases, the bull phase and the bear phase.
The Random Walk Theory opposes the idea of the stock markets having market trends. It states that the changes in stock prices have the same set of values and they are not dependent on each other, therefore, the past movement or trend of market or a stock price cannot be implemented for prediction of its movements in the future. This theory suggests that the stocks follow an unpredictable and random path.
The Efficient Market Hypothesis is a theory that suggests it is not possible to “beat the market” because of the reason that stock market efficiency propels existing share prices to assimilate every time and display all the appropriate data. This means that the stocks are always traded at their fair values on stock exchanges and so it is not possible for the investors to either buy undervalued stocks or sell stocks at a higher value.
The Stock Market can have three kinds of market trends:
- Primary Trends: Bull Market and Bear Market.
A Bull Market shows that the economic condition is good, there are plenty of jobs available, there is an increase in the gross domestic product (GDP) and the stock prices are rising. A Bull market is present for an extended period of time when the price rises in a stock market are quicker than the historical averages.
A Bull Market is often associated with increasing investor confidence and it prompts the investors to buy stocks in anticipation of more capital gains. An exaggerated bull market influenced by overconfidence and/or speculation can result in a stock market bubble. Bull markets cannot be an everlasting condition and sometimes can lead to a dangerous situation if there is overvaluation of stocks. The Bull Market of the 1990s can be described as the most extensive and famous bull market ever involving the U.S. and many other global financial markets.
A Bear Market shows that the economy is poor, recession is likely to occur, and stock prices are declining day by day. A bear market is present for an extended period of time when the share prices are going down. A Bear Market is always accompanied by far-reaching pessimism. Investors are panicked by anticipation of further losses and they are instigated to sell stocks. An exaggerated bear market is often associated with diminishing investor confidence and panic selling and may result in a stock market crash and subsequent recession. The bear market from 1930 to 1932 can be described as the most famous bear market which indicated the beginning of the Great Depression.
- Secondary Trends (Short-Term): Correction and Bear Market Rally. A secondary trend is an impermanent change of price within a primary trend. The tenure can range from a few weeks to few months. A correction is a temporary decrease at the time of a bull market, and a bear market rally is a temporary increase at the time of a bear market. Natural calamities and political turbulence can force a market correction. A remarkable bear market rally occurred in the Dow Jones index after the stock market crash in 1929.
- Secular Trends (Long-Term): Secular Bull Market and Secular Bear Market. A secular market trend is a trend that is long-term in nature and may last from 5 to 20 years and includes subsequent primary trends. In a secular bull market the bear markets are smaller in duration than the bull markets. Here the bear markets do not erase the gains of the previous bull market completely. In a secular bear market, the bull markets are smaller in duration than the bear markets and do not completely make up the losses of the previous bear market.