Understanding the Stock Market - Bull and Bear Markets.
Bull & Bear Markets
Simply put, bull markets are movements in the stock market in
which prices are rising and the consensus is that prices will
continue moving upward. Bear markets are the opposite - stock
prices are falling, and the view is that they will continue
falling. The economy will slow down, coupled with a rise in
unemployment and inflation. Investors who think and act as
though the market will continue to rise are bullish, while those
who think it will keep falling are bearish.
What Drives Bull and Bear Markets?
What causes bull and bear markets? They are partly a result of
the supply and demand for securities. Investor psychology,
government involvement in the economy and changes in economic
activity also drive the market up or down. These forces combine
to make investors bid higher or lower prices for stocks. To
qualify as a bull or bear market, a market must have been moving
in its current direction (by about 20% of its value) for a
sustained period. Small, short-term movements lasting days do
not qualify. Bull and bear markets signify long movements of
significant proportion. The longest-lived bull market in history
is the one that began in 1991 and ended in 2000. Other major
bulls occurred in the 1920s, the late 1960s and the mid-1980s.
However, they all ended in recessions or market crashes. The
best-known bear market was, of course, the Great Depression. The
Dow Jones Industrial Average in the USA lost roughly 90 percent
of its value during the first three years of this period. There
were also numerous others throughout the twentieth century,
including those of 1973-74 and 1981-82.
Predicting Bull and Bear Markets.
In their attempts to predict the market, economists use
technical analysis. Technical analysis is the use of market data
to analyse individual stocks and the market as a whole. It is
based on the ideas that supply and demand determines stock
prices and those prices, in turn, also reflect the moods of
investors. One tool commonly used in technical analysis is the
advance-decline line, which measures the difference between the
number of stocks advancing in price and the number declining in
price. Each day a net advance is determined by subtracting total
declines from total advances. This total, when taken over time,
comprises the advance-decline line, which analysts use to
forecast market trends.
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