Flying bulls and diving bears?
what it is about?
A 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.
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.
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
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.
of positive or negative return, as
* a price rise provides them a gain,
* a price fall make them suffer a loss.
* 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:
aftera while, price rises make demand decrease and price falls attract more
demand. This is because the "physical users" do their cost calculations (not
only to cover the buying price, but also storage and transport charges).
markets in which the law of offer and demand works better.
In those "hard stuff" markets, herding exists also but has a shorter life:
aftera while, price rises make demand decrease and price falls attract more
demand. This is because the "physical users" do their cost calculations (not
only to cover 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:
The criteria that a bear or bull trend has settled in are usually:
- Its
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),
highly probable that it it has "settled" and can last several years),
- Its
size
(at least minus 20% from the top or plus 25% from the bottom
of the previous trend
of the previous trend
Specific traits and properties
- The alternations of uptrends and downtrends are defined as market cycles.
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.
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 change of trends!)
and even microtrends within a day or a few days, ripples within the tide.
Those short term swings appear on a chart as zigzags, which average
amplitudes are measured as "volatility".
and even microtrends within a day or a few days, ripples within the tide.
Those short term swings appear on a chart as zigzags, which average
amplitudes are measured as "volatility".
- Uptrends and downtrends might turn into excessively large or violent rise or fall,
In that case 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
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.
Therefore,
An asset price rise or fall signals that buyers - as well as sellers - consider that more stocks are bought than sold (or the opposite).
Actually, the quantity of asset
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.
Therefore,
that the asset has become more
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 have an impact on the "intrinsic" value of the asset as traders
estimate it (yes, actually, value is always an estimate, until a transaction
sets a price).
Typical "objective" factors for stock valuation are growth prospect, general
liquidity, inflation, interest rates...
estimate it (yes, actually, value is always an estimate, until a transaction
sets a price).
Typical "objective" factors for stock valuation are growth prospect, general
liquidity, inflation, interest rates...
- And/or
collective psychological factors
that affect investors and change that "perceived" value
(herding, underreaction - adjustment - overreaction, selective perception,
hope / greed or fear among other types - or factors of - misreactions,
(herding, underreaction - adjustment - overreaction, selective perception,
hope / greed or fear among other types - or 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)
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.
This rather popular practice is a factor that can reinforce such a 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 discrepancy
between prices and "real" value becomes unsustainable.
2) The opposite one is contrarian investing,
Contrarian investing is basically to take market positions that goes against the trend
under the expectation 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 the choice of what horses to
ride (countercyclical assets to start with...)
under the expectation 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 the choice of 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 relations but each
one obey also its own factors and has its own behavior.
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 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 is taking 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 periodically
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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and more specifically the trend and cycle articles
Back to collection: economic articles migrated from Knol
Back to collection: finance articles migrated from Knol
Pageviews for this article before migration from Knol: 4.6 k
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