Market trend and market cycle

Bear market and bull market

A market trend is a long period of market price rise or fall:
bull market or bear market.
This is usually considered as a phase in a market cycle.

A trend might become excessive and result in a bubble or crash.

A market cycle depends on the variation of market players sentiments.
They are not always correlated to the business cycle.

Flying bulls and diving bears?

Uptrends, downtrends and "cycles":
what it is about?
If uou invest in a market, for example a stock market, don't expect a
straight, flat, eventless road
.
There are not only many small zig zags, but also very long ups and downs

graph sousA market trend is a long period (typically several years)
      • of price rise (usually called bull market)
      • or price fall (bear market).
The alternation of uptrends and downtrends, big zigs and big zag, is
usually defined as market cycles.


The myth of periods of fat cows and periods of skinny ones seems to
have some truth.
OK, but what could fatten or starve those bovines ... or markets?
A section below tries to detect those causes.

Which markets are the most exposed?

Those notions apply mainly to
* Financial assets (stocks...), (*)
*
Foreign currency exchanges ("Forex"),
*
Interest rate markets (bonds...),
*
Commodity markets.
Real estate and collectibles can be affected also.
Even human tastes have their turning points.
For asset holders in such markets, a price trend is also defined as
a period of positive or negative return,
as

* a price rise provides them a gain,
* a price fall make them suffer a loss.

Yes an asset holder's return in not just the interest, rent or dividend
but also the asset price variation

By the way in some kind of operations (short selling...), that we will not
detail here the results are inverted (a price rise gives a loss and a price
fall gives a gain).


(*) Financial asset markets are more prone to herding than other
      markets.
      People try to buy or keep such assets when they see that most
      other investors
are eager to buy them and their prices rise. 
      Reciprocally,  they try to sell them when seeing their prices fall.


Therefore excesses might increase for a longer time than in
commodity
markets in which the law of offer and demand
works better.


In those "hard stuff" markets, herding exists also but has a
shorter life. After a
while, price rises make demand decrease
while price falls attract more demand.
This is
because "physical users" do their cost calculations (that
cover not only
the buying price, but also storage and transport
charges).

Criteria that a trend is on

Looking for clues that a bull or a bear is in the farmyard

The criteria that a bear or bull trend has settled in are usually:
  • Its plancalend length / persistence
At least a year, maybe with short lived reversals, then it
becomes highly probable that it it has "settled" and can last
several years),

  • Its measure size
(at least minus 20% from the top or plus 25% from the bottom
of the previous trend

Specific traits and properties

  • An alternation of uptrends and downtrends is a market cycle.
This is a bit simplistic as the word "cycle" gives the idea of a regular
wheel rotation,
while in fact market prices cycles are irregular in
their size, speed and length.
  • Usually inside the main trends there are subtrends
(do not confuse temporary corrections with true trend
changes!)
and even
microtrends
within a day or a few
days,
ripples within the tide.

Those short term swings appear on a chart as zigzags.
Their average amplitudes are measure
d as "volatility".
  • Uptrends and downtrends might become uncontroled beings 
In such cases they become excessively large or violent rise
or fall.
Here we have a market bubble or crash

What causes asset market trends

There is an instinctive but wrong idea that an uptrend or downtrend
means that more stocks are bought than sold (or the opposite).
Actually, the quantity of asset buysell bought is obviously equal to the
quantity that is sold when an exchange takes place.
See in the asset market article an example of how market prices
are reached
and allow an exchange
.

Thus,
an asset price rise or fall signals that buyers - as well as sellers -
consider
that the asset has become more gem valuable or less
valuable
.

An uptrend for example shows that buyers accept to pay a higher price
and sellers accept to sell only at an higher price.

A price trend that affects a whole class of assets, for example a whole stock
market, can be due to:
  • Fundamental economic factors
They impact the "intrinsic" value of the asset, as estimated by
traders.
(yes, usually, value is an estimate, until a transaction
sets a price).
Typical "objective" factors for stock valuation are growth
prospects, the general liquidity, inflation, interest rates...
  • And/or group collective psychological factors
that affect investors and change that "perceived" value
(
herding, underreaction - adjustment - overreaction, selective
perception, hope / greed or fear among other types / factors
of -
misreactions)

Investor strategies when facing trends

The trend phenomenon leads to various investment strategies.
Here are the two extremes:


1) One is trend following (aka momentum trading)

Trend following is to buy when the trend goes up and to sell when it goes
down,
under the expectation that the trend will persist.

It is a rather popular practice and thus a factor that can reinforce that
trend persistence
(self-fulfilling prophecy) ...at least for a while.

=>
This strategy might be wise when the trend is rather new and already
       
"settled", in its second year for example. Don't take it as a certainty!
=>
But after a few year it might become perilous as the growing gap 
        between prices and "real" value becomes unsustainable.

2) The opposite one is contrarian investing,

Contrarian investing is basically to take market positions that go against
the trend, something
as contrarians do when they expect that the
trend will soon revert
.

Well, such a reversion has a chance to happen, but it might take a long
time.

=>
A contrarian strategy has to be highly selective in chosing what
        horses to ride (countercyclical assets to start with...)

Business cycles and asset market cycles

Business cycles are alternations of phases of economic growth and
phases of stagnation or recession.

Business cycles and financial asset cycles (and other asset cycles) are
not fully correlated
.

The economic sphere and the financial sphere have of course reciprocal
relations but each one obey also its own factors and has its own behavior.

For example, a dramatic stock market price move does not mean
always that a crucial change in economic growth or in consumer prices
takes place or will take place.
Usually a business cycle lasts longer than a stock market cycle.


More or less "cyclical" phenomena seem to occur also in other social
areas than economics and finance:
* i.e in politics, the famous "voter's pendulum" tends to swing between
   the right and the left.

* As for garment fashion...

Source and further readings

From the Behavioral finance glossary
and more specifically the
trend and cycle articles

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M.a.j. / updated : 09 July 2015 
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