Trend

Financial Dictionary -> Investing -> Trend

In finance, a trend is the tendency the market or the price of assets is moving. In order to determine the right types of investment instruments to buy, it is important to accurately assess and project market trends. Individuals who watch the stock markets closely attempt to identify and assess current movements, projecting how long the latter are likely to continue. Markets are moving in particular directions over the course of time. Trends that last up to a few months are called secondary trends, as opposed to primary trends, which have duration of a year or more. Secular trends span a period from 5 to 25 years.

Trends are determined by means of technical analysis in view of the foreseeable price response which is based on price resistance and price support that vary over time. 'Bear market' refers to a downward trend. The opposite of that is naturally bull market. These terms are employed to describe the market in general as well as specific segments and securities.

Market trends are also identified using the efficient market hypothesis. It is based on the concept of financial markets that secure the building blocks for making a decision on what to buy and sell. According to the hypothesis, it is possible to do research on the factors that lead to the present market condition.

A market correction is a kind of secondary trend. Corrections are downward shifts that are not sufficient to be referred to as a bear market. They usually involve a decline in the range of 5 - 20 percent. The so-called sucker's rally is another secondary market trend. The increase is never over 20 percent and thus not substantial to be called a bull market. Examples of this include the Dow Jones index, following the crash in 1929, and the Japanese Nikkei 225 since the 80s. The latter has witnessed an overall downward trend in this time period.

The bull market stands for a great opportunity for investors because future capital gains are anticipated. This occurs in times of economic downturn just before recovery signs begin to emerge. Examples of bull markets include SENSEX between 2003 and 2008. The index then rose to twenty-one thousand points, up from twenty-nine hundred.

A bear market, on the other hand, is evidenced when there is a drop in price of over 20 percent over a two-month period or more. Examples of this include the 1929 crash. Then, 89 percent of the Dow Jones Average market capitalization was wiped out by the summer of 1932. This marked the beginning of the Great Depression. There was another bear market between 1937 and 1942, and then the market fell by 50 percent. As of recent, a worldwide bear market took place between late 2007 and early 2009.

A secular market trend consists of a series of primary trends. A secular bull market comprises of smaller bear markets and bigger bull markets. A secular bear market is the opposite.

One of the ways to measure market trends is by tracking 'investor sentiment'. When the majority of investors have a negative outlook, it is considered a precursor to the market's hitting bottom. Tools measuring investor sentiment include the Short Interest/Total Market Float, the Investor Intelligence Sentiment Index, the Nova-Ursa ratio, the Put/Call ratio, and the American Association of Individual Investors sentiment indicator.