Stock Market Behavior

Everyone has heard of bear and bull markets.  These are terms that represent the up and down cycles that are natural within the market.  A bull market is the term used for the prolonged increase of share values, while bear markets note a long-term drop in prices.  These overall trends are known as “primary trends.”  Depending on your style of trading, it is possible to take advantage of both bear and bull markets and take in a profit. 
               
The market, not surprisingly, is not so easily defined by these two terms.  Within bull and bear markets, price reversals often take place.  These are known as secondary trends.  In an overall bear market, share prices could rise giving birth to a “correction,” or bull market rally.  A bear market rally takes place when there is a short term drop in share value during an overall bull market.

Individual sectors of the market often act like they have a mind of their own, regardless of what identifier is placed on the overall market.  Stock market bubbles are a type of bull market that occurs in a specific sector.  Usually, gains made in the market during a bubble are far above what would be considered normal bull market gains.  A recent example is the dot-com bubble of the late 1990s.  Traders reacted to the new e-commerce technology by buying up as many shares as possible.  This caused stock prices to soar far above a level that companies could sustain since shares were greatly overvalued.  When investors finally realized this and began selling, prices abruptly came crashing down causing thousands of individuals to lose money.
               
This brings us to another unique behavior of the stock market: crashes.  This is when prices drop sharply over a very short time period.  The most famous of these occurred in 1929 when markets around the world fell dramatically.  In the United States, the Dow Jones dropped 39.5% in a matter of days.   A crash need not be so dramatic, however.  They can occur in individual sectors rather than across the entire market.  Bubbles are often accompanied by crashes in specific sectors since the market cannot sustain inflated prices for long. 
               
The important thing to remember about stock market trends, both primary and secondary, is that they are almost impossible to identify while in the midst of one.  The Fed does not officially identify market trends until they are at least a year old.  Even then, they often are updating the condition of past markets. 

Banking - Business Finances - Economics - Insurance - Investing
Major Purchases - Personal Finances - Stock Market - Taxes