Okay, let's unpack this. We are diving into one
of the most fundamental concepts in finance,
the market trend. It's this perceived tendency
of financial markets to, you know, move in a
particular direction over time. What defines
this powerful sweeping movement and how exactly
do analysts categorize these trajectories? That
really is the core question, isn't it? I mean,
for anyone who wants to move beyond just, you
know, watching the ticker. Right. And actually
start navigating the markets. A market trend
is. It's just that. It's the long arc of price
action, the direction of travel, but sustained
over a real period. It gives you the context
for every single decision. And we're not just
talking about the day -to -day noise here. little
blips on the screen. Not at all. We're looking
to understand the huge multi -year shifts that,
you know, really define economic history. These
are like the tectonic plates moving beneath the
daily volatility. OK, so how do we make sense
of it all? Well, structure is everything. Analysts
classify these trends into three sort of nested
layers based on how long they last. Three layers.
Yep. You have the secular trend, which can operate
over decades. Then you have the primary trend,
which is what we often think of as a market cycle.
And finally, the secondary trend. That's the
short -term noise within the bigger cycle. The
whole game of technical analysis is built on
spotting these movements. You know, drawing friend
lines, finding support and resistance. That sounds
like a pretty elegant framework, almost like
a map for the chaos. Yeah. There has to be a
catch, right? A limitation that everyone needs
to understand. A huge one. And it's the most
critical caveat, something you, the listener,
have to get right from the start. The limitation
is just baked into the process. A future market
trend can only, and I mean only, be definitively
determined in hindsight. So all this analysis
is backward looking. We have to be crystal clear
on this. Market timing, predicting the future.
It's a game of probabilities. It's educated guessing.
It's not a crystal ball. Technical analysis lets
us identify and characterize past trends with
perfect clarity. So the market trend is really
the ghost of price action past. We can draw the
lines perfectly on the history books. Exactly.
But looking forward, we're flying blind. Precisely.
When we say we've identified an uptrend, all
we're doing is connecting a series of higher
highs and higher lows on a chart that's already
been printed. For a downtrend, you know, it's
lower lows and lower highs. The problem, of course,
is that in the present, those trend lines are
constantly being challenged or broken or redrawn.
The now always feels uncertain, which is why
having this... Language, secular, primary, secondary
is so essential. It helps you frame where you
are, even if it can't tell you where you're going
tomorrow. Since we are defining the language
of markets, we have to start with the most famous
animals in finance. The bull and the bear. The
bull and the bear. Everyone knows a bull market
means prices are going up and a bear market means
they're going down. But what's really fascinating
here is the origin story. It's not what you'd
expect. No, it's one of the great anecdotes of
financial history, and it shows you just how
intertwined markets and, well, society were.
These terms didn't come from some academic theory.
They came from the rough and tumble world of
London's Exchange Alley way back in the early
18th century. Exchange Alley. So this is before.
A formal stock exchange even existed. This is
the Wild West of trading. The absolute Wild West.
And let's talk about the bear first, because
that term actually came before the bull. OK.
It came from a group of traders called bearskin
jobbers. These were middlemen who were basically
running a futures market for bearskins. But the
key thing is they were doing what we would now
call naked short selling. Selling something you
don't actually own yet. Exactly that. They'd
signed a contract to sell bearskins at a set
price on a future date without having any skins.
They were betting that the price of the skins
would fall before they had to deliver so they
could buy them cheap and, you know, pocket the
difference. So they were selling the bear's skin
before they'd actually caught the bear. You've
got it. That's the phrase. And that idea, that
act of selling first and betting on a price drop
became synonymous with being a bear. A bear is
pessimistic by nature. They're wagering on a
decline. That is such a vivid, perfect origin
for short selling. So where does the bull come
in? The bull came a bit later, probably just
as a natural opposite in conversation. The traders
who got called bulls were the ones buying shares,
often on credit, going long. They were optimistic.
And the names themselves were an analogy to the.
The popular sports of the time. That's the leading
theory, yes. Think about it. Bear baiting and
bull baiting were huge, if brutal, cultural events
back then. Right. So the bull was put in opposition
to the bear, not because of how it attacks, but
because the two animals were famously paired
against each other in the fighting pits. The
terms just mirrored the two opposing sides in
the market. And we actually have a record of
this from the time, don't we? A description of
what these traders were like? We do, and it's
fantastic. A guy named Thomas Mortimer in his
17... book, Every Man His Own Broker. He wrote
it all down. He gives us this amazing window
into the psychology. What did he say? He described
the bulls, the ones who had bought too much,
who were over leveraged, wandering around the
offices moaning, just desperate to find someone,
anyone to buy their shares. So that moment of
panic when your optimism turns sour. Exactly.
And then he described the bears, the short sellers,
as rushing frantically around the alley, trying
to buy up any shares they could find to close
out their positions. He literally says they were
devouring any shares they could find. Wow. It's
the perfect contrast, right? The bull is suffering
from too much greed and the bear is suffering
from intense fear. That is so much richer than
the simple story you always hear. Oh, the folk
etymology. Yeah, we should probably debunk that
quickly. The idea that a bear swipes his claws
down and a bill thrusts its horns up? That's
the one. It's a charming story, but it's completely
unrelated. The sources are clear. The real origin
is in those 18th century market practices. It's
a good reminder that, you know, this jargon has
a very human, very visceral history. Okay, now
that we have the language, let's get into the
geography of market time. You talked about the
ocean. Yes. If you imagine the market as this
huge ocean, you have to understand the tides,
the waves, and the little ripples all at the
same time. As we said, structure is key. And
that means breaking it down into those three
nested layers. Let's start with the biggest one,
the one that feels almost... Geological, the
secular trend. Secular trends are the really
profound long -term movements. We're talking
massive timeframes, anywhere from five to 25
years, sometimes even longer. Wow. These are
the mega trends. They're driven by huge structural
shifts, demographic changes, massive new technologies.
Think about the invention of the internet or
the baby boomers entering the workforce. Those
things create secular trends. So if the market
goes up for, say, 15 years, that's a secular
bull market. But you said it's not just... a
straight lineup. That's the critical part to
understand. A secular trend is defined by its
net direction over that long period. So a secular
bull market has this prevailing upward movement.
But inside that two decade climb, you will absolutely
have several multi -year primary bull markets
interrupted by some very painful primary bear
markets. It's a long term upward journey, but
one that is constantly testing your resolve as
an investor. It sounds like the market rewards
patients on a massive scale. But only if you
can stomach some serious downturns along the
way. Give us some solid examples. Absolutely.
The classic example of a secular bull in the
U .S. is a period from about 1983 all the way
to the year 2000. The dot -com boom. Right. And
you could argue it extended to 2007 in some sectors.
It was this long, powerful climb driven by falling
interest rates, the rise of personal computing,
globalization. And even with sharp shocks like
Black Monday in 87, the overall direction just
kept going up. Another great example was the
commodities boom in the 2000s, driven almost
entirely by the explosive growth in China. And
on the other side of the coin, the secular bear
market. Yeah. That must be where investors just
lose all hope over time. It's a slow, grinding
death for optimism. That's when the prevailing
trend is down. And it's made up of these smaller,
deceptive bull rallies that give you false hope.
Right. And then much larger, more severe bear
markets that crush that hope. The textbook case
is the U .S. stock market from 1929 to 1949.
20 years. 20 years. After the Wall Street crash,
the market was just brutalized by the Great Depression.
The overall movement was just... flat to negative
for an entire generation. That kind of experience
must have scarred people for life financially.
It absolutely did. It created a decades long
bias towards safe assets like bonds. And another
powerful example just to show it's not only stocks
is gold. It had a massive secular bear market.
It peaked at around $850 an ounce in January
1980, driven by inflation fears. I remember that.
And then it just declined. relentlessly for almost
20 years. It finally bottomed out in June 1999
at just $253 an ounce. That moment is famously
known as the brown bottom. That's a 19 -year
downward spiral. Okay, so zooming in from that
25 -year view, we get to the primary trend. This
is what people usually mean when they say market
cycle, right? That's exactly right. A primary
trend is that medium -term engine. It typically
lasts for a year or more, maybe as long as...
five or 10 years in some cases. The key thing
here is that the movement has to be broad. It
can't just be one hot sector. It has to have
support across the entire market reflecting the
underlying health of the whole economy. So this
is the level that really drives most. Investment
decisions, retirement planning, all of that.
Precisely. It defines whether we're in a cyclical
bull, which is a sustained rise, or a cyclical
bear, a sustained decline. And the sum of all
these primary trends is what creates that big
secular trend we just talked about. Which brings
us to the final layer, the ripples on the surface,
the short -term noise. The secondary trends,
these are the short term changes in direction
that happen inside a bigger primary trend. It
could be a reaction to an earnings report, a
geopolitical flare up, a central bank comment.
Right. They last a few weeks, maybe a couple
of months. They are the definition of volatility.
And the lesson for an investor there seems to
be learn to ignore them. They're designed to
shake you out, but they don't matter if the main
primary trend is still intact. That is the so
what of it. A secondary trend is like a stress
test. It shakes out the weak hands, the investors
who panic easily before the primary trend can
get going again. These little corrections and
rallies are a necessary part of any big move
up or down. OK, let's focus now on those two
major states of the primary trend, bull and the
bear. We need to get into the precise technical
rules here because the line between a healthy
market and a full blown panic seems pretty thin.
And it is. Knowing the thresholds is crucial.
But beyond the numbers, the most important thing
is the huge psychological shift that defines
these two periods. It's the difference between,
you know, optimism and utter despair ruling the
day. Let's start with the bull, a period of rising
prices. But what's the technical trigger? When
is a bull market officially declared? The globally
accepted definition is that a primary bull market
officially begins when stocks rise 20 percent
from their previous low. 20 percent. That 20
percent surge from the bottom signals a really
substantial sustained shift in momentum. And
conversely, the bull market is declared over
when stocks fall by 20 percent from their peak.
So that 20 percent rule is the key. It's the
line in the sand. Now, the source material had
a really interesting little nuance here, saying
a bull market might not be a true bull market
if it's happening inside a huge secular bear.
Can you explain that? Yeah, that's a more advanced
but important point for analysts. Some strict
cycle theorists would argue that a 20 % rally
is just that, a secular rally, if the long -term
drivers, you know, demographics, interest rates,
if those are still negative. I see. In their
view, a true primary bull needs all the big forces
aligned. But for most everyday financial reporting,
that 20 % rule is the benchmark. OK, now, the
psychology of this is fascinating. It's totally
counterintuitive. The start of a bull market
isn't happy. It's gloomy. It is the ultimate
contrarian signal. A bull market starts in widespread
pessimism. It begins at the exact moment the
crowd is most bearish, when fear and disgust
are at their peak. And then it evolves. It evolves
through these predictable stages. It goes from
deep despondency to cautious hope, then to widespread
optimism. And it finally ends in pure unchecked
euphoria right before the whole thing breaks.
And this psychological wave often happens before
the real economy gets better. The market is like
a leading indicator. It is a leading indicator.
It often starts its recovery while unemployment
is still high and the economy is in recession.
It shows you the market trades on future expectations,
not the present reality. The so -called smart
money gets in when the headlines are still awful.
The historical data on this is pretty incredible.
It's staggering. If you look at the data from,
say, 1926 to 2014, the average duration of a
bull market was eight and a half years. Eight
and a half years. Think about that. And the reward
for staying the course, the average cumulative
return was an astonishing 458%. 458%. That's
how generational wealth is built right there.
That's the engine. And the annualized gains were
also huge, ranging from about 15 % up to 34 %
a year. We're talking about periods like the
post -war boom or the mid -90s tech revolution.
And this isn't just a U .S. or Western thing.
Not at all. A great global example is India's
SENSEX index. In April 2003 and January 2008,
it went on an epic bull run. In that five -year
window, the index went from around 2 ,900 points
to over 21 ,000. That's a return of over 600%.
It just shows you the raw power a bull market
can unleash. Okay, now for the dark side, the
bear market. This is that terrifying transition
from euphoria into fear and panic. It's a complete
reversal of confidence. And technically, it's
defined as a general decline of 20 % or more
from the peak, lasting at least two months. That
duration is important. It means it's not just
a flash crash. And we have to distinguish this
from a correction. Absolutely. A drop of 10 %
to just under 20 % is a market correction. Corrections
can feel scary, but they're generally seen as
healthy. They shake out the speculation. A full
primary bear market is that deeper, more sustained
20 % drop. And what about this idea of bear territory?
That sounds like the phase where the danger is
clear, but the official call hasn't been made
yet. That's a great way to put it. Bare territory
is the prelude. It's when the market might still
technically be in a correction, but all the warning
lights are flashing red. Like what? You see the
VIX, the fear index just skyrocket. Consumer
sentiment starts to plummet. Businesses get pessimistic.
Unemployment expectations start rising. The whole
economic outlook just sours fast. And this can
often be triggered by, say, policy uncertainty
without getting into the politics of it. Yes,
the source material notes that major policy shifts,
things like sudden tariff changes or unexpected
interest rate moves, can absolutely push a market
into bear territory. The key thing to know is
that when a market enters bear territory, it
very often leads to the full -blown bear market
confirmation. So how do we know when the pain
is finally over? Well, technically, a bear market
is over when the market not only recovers but
makes a new all -time high. But the more common
signal is, again, that 20 % rule. When Texas
gained 20 % or more from their absolute lowest
point, the bear is considered to be over. The
20 % rule is the way in and the way out. It's
the gatekeeper. And look, bear markets are much
shorter, but they are incredibly intense. The
data from that same 1926 to 2014 period shows
the average bear market lasted just 13 months.
Only 13 months. But the average cumulative loss
in that short time was a crushing 30%. Wow. So
in just over a year, you could lose a third of
your portfolio. That speed explains the panic.
It really does. The annualized losses could be
anywhere from nearly 20 % to a gut -wrenching
47%. And the examples are burned into our financial
memory, right? The 29 crash, which wiped out
89 % of the Dow. 89%. The long grinding bear
market of the 1970s with the energy crisis and
of course the 2008 financial crisis and the more
recent 2022 decline driven by inflation and weight
hikes. They are incredibly destructive. OK, so
we've defined the trends. Now we get to the really
hard part. trying to spot the turning points.
This is what every investor dreams of doing,
but almost nobody gets it right. It's the impossible
art of market analysis. These inflection points,
the tops and the bottoms, they are only truly
clear in hindsight. They're just fraught with
peril. Our sources say a market top usually isn't
some big dramatic single day event. That feels
wrong given the chaos that comes after. It is
a bit counterintuitive, but it's one of the great
lessons. The market just... reaches its highest
point for a while. But the recognition of that
is almost entirely retrospective. Why? Because
when the peak actually happens, the euphoria
is usually still at a maximum. No one believes
the party is over. Then prices start to drift
down, sometimes slowly, sometimes very quickly.
Are there any technical signs that the smart
money might use to get out before the crash really
accelerates? Yes. This is what technical analysis,
especially the work of people like William O
'Neill, comes in going back to the 1950s he identified
that a market top is often characterized by an
accumulation of distribution days distribution
days okay that's a key term what is that a distribution
day is a trading day where a major index like
the s p 500 closes lower than the day before
but on higher trading volume higher volume on
a down day exactly the high volume suggests that
Big players, institutions, are actively selling
or distributing their shares to the general public
who are still enthusiastically buying the dip.
So the pros are quietly heading for the exits
while the retail crowd is still rushing in. That's
the signal. It's a silent warning bell. The rule
of thumb is that if you see three to five of
these distribution days in a major index within
a short period, it's a strong sign that a top
is being formed. Institutional support is just
evaporating. Can you give an example? Sure. The
peak of the dot -com bubble, the Nasdaq -100,
peaked on March 24, 2000. But in the weeks leading
up to that, there were clear distribution days.
The same thing happened before the 2008 crisis.
The S &P 500 peaked on October 9, 2007, again
after a period of clear institutional selling.
Okay, so now the mirror image. The market bottom.
This is the end of the downturn, the start of
a new bull. It's the most profitable time to
buy and also the most terrifying. And trying
to pinpoint that exact moment, what's called
bottom picking, is famously difficult. The danger
is a false signal. A false bottom. Right. You
buy in, the market bounces for a couple of days,
you think you're a genius, and then it resumes
its plunge and you're stuck with even bigger
losses. This is where that famous contrarian
quote comes in. Baron Rothschild. The wisdom
is that the best time to buy is when there is
blood in the streets. Meaning? Meaning you buy
not just when prices are low, but when sentiment
is at its absolute worst. When there is panic,
when there is fear everywhere, you're buying
the fear, not the valuation. And the history
of market bottoms really backs that up. It does.
Think of Black Monday in 1987. The Dow bottomed
out after a historic one -day crash. That was
pure fear. Or the bottom after the dot -com bust
in October 2002. The tech -heavy Nasdaq fell
almost 79 % from its peak. 79 %? That's just
a wipeout. It's a total wipeout. It shows what
happens when a real bubble bursts. And more recently,
the bottom after the 2008 crisis was in March
2009. In all these cases, the bottom was only
clear once that 20 % rebound started and actually
held, confirming that the fear had finally burned
itself out. Now, before we move on, we have to
talk about the most deceptive trap of all, the
false signal that tricks people into getting
back in too early. Ah, yes, the bear market rally.
This is a short -term price jump of, say, 5 %
or more that happens before prices start falling
again. It is an incredibly dangerous trap for
investors. It sounds kind of harmless, but the
other names for it are a lot more vivid. They
definitely capture the pain. It's often called
a sucker's rally or the most famous one, the
dead cat bounce. The grim logic being that even
a dead cat will bounce if you drop it from a
great enough height. A dark but very clear analogy
for a market that has a brief recovery before
plunging even further. We saw them all the time
during the Great Depression. After the 29 crash,
there were several rallies of more than 10 percent
that sucked investors back in right before the
market collapsed toward its true bottom in 32.
Another classic case is Japan's Nikkei 225 index.
Throughout its long two -decade downturn from
the late 80s, it had numerous powerful, sharp
rallies that all ultimately failed. This is why
bottom -picking is so risky. These rallies look
and feel like the real thing. Okay, here's where
it gets really interesting for me. We've mapped
the what and the when. Now let's get to the why.
We're moving beyond the charts and into the human
element, right? Supply and demand. This is the
critical pivot. At the end of the day, prices
don't move because of lines on a chart. They
move because of human decisions. If you can understand
the behavior, you can understand the trend. Let's
start with the basic mechanics. The price of
anything is set by supply and demand. But there's
a huge myth here we need to bust right away.
Yes. You always hear it on the news. The market
went up today because there were more buyers
than sellers. Right. That statement is mathematically
impossible. By definition, the market always
balances. For every single transaction, there
has to be one buyer and one seller. So if the
number of buyers always equals the number of
sellers, how does the price ever move? It's not
about the number of people. It's about the intensity
of their desire. Think of it like an auction.
You have a line of sellers with their asking
prices and a line of buyers with their bidding
prices. When demand surges, it means the buyers
get aggressive. They're willing to pay the higher
asking prices of the sellers. That's what moves
the price up. When supply surges, the sellers
get desperate and they're willing to accept the
lower bids from the buyers. That moves the price
down. So it's not the quantity of people, it's
the aggression of their bids and offers. It's
about who's more motivated. Exactly. And this
is constantly being affected by big money moving
around. Imagine a huge pension fund decides to
sell government bonds and buy tech stocks. They
are simultaneously creating a huge supply of
bonds and a huge demand for stocks. That single
act pushes the price of bonds down and the price
of tech stocks up. Which brings us to the core
of investor behavior. Ideally, everyone wants
to buy low and sell high. But in reality, driven
by emotion, people do the exact opposite. They
buy high, near the top, driven by greed and FOMO
fear of missing out, and they sell low, near
the bottom, driven by pure panic. And this is
why the contrarian strategy even exists. It's
the whole basis for it. Contrarian investors
try to fade that emotional herd behavior. They
are buying when everyone else is terrified and
selling. That's what's called the accumulation
phase. Correct. And they are selling or distributing
their shares when the euphoric crowd is clamoring
to buy at the top. And this leads to a really
critical idea from behavioral economics, how
this herding instinct actually breaks the normal
rules of supply and demand. Yes. Standard economic
theory assumes what's called a negative feedback
loop. If a price goes down, demand should go
up because it's a bargain and supply should go
down because nobody wants to sell cheap. This
stabilizes prices. But in the stock market, that
often gets flipped on its head. A price increase
can lead to an increase in demand. That's the
euphoria, everyone piling in. And a price decrease
can lead to an increase in supply. That's the
panic selling. So that's the mechanism that creates
bubbles and crashes. It is the mechanism. When
that negative feedback loop breaks, the system
becomes unstable. It feeds on its own momentum,
its own emotion, until it finally exhausts itself
or just violently snaps. The economist David
Hirschleifer put it perfectly. He said trends
move from investor underreaction to new information,
and they end with massive overreaction. So if
emotion is the driver, how on earth do you measure
it? How do you measure the mood of millions of
people? You use proxies. You look for data that
quantifies the behavior of the herd. And market
sentiment is an incredibly powerful contrarian
indicator, especially at the extremes. So when
everyone is terrified, the blood in the streets,
that's a buy signal. That's the theory. When
an extremely high percentage of investors are
bearish, it's a strong sign that a market bottom
is probably close. And there are several tools
we use to track this. What's the first one? The
Investor Intelligence Sentiment Index. This looks
at professional newsletter writers, and it measures
the spread between the bulls and the bears. When
that spread hits a historic low meaning, basically
all the pros are pessimistic, it's a very strong
signal of a potential bottom. It quantifies the
exhaustion of selling. That's so interesting.
And you mentioned it's more reliable at bottoms
than at tops. Yeah. Why is that? It's about the
nature of fear versus greed. Fear is a powerful,
sudden emotion. It leads to quick, sharp bottoms
when everyone panics at once. Greed, on the other
hand, is a slow burn. Euphoria can last way longer
than you think is rational, so it's much harder
to time the top. Okay. What's another indicator?
The AAI sentiment indicator. This tracks individual
or retail investors. When that reading is, say,
minus 15 % or lower, it means a huge majority
of individuals are negative. And that often means
most of the decline has already happened. The
retail investor is usually the last to capitulate.
It's a measure of when the general public has
finally given up. Are there tools that track
actual bets being made? Yes. And those are very
powerful. The put call ratio is a big one. A
put option is a bet the market will fall. A call
option is a bet it will rise. Right. So a very
high put call ratio means traders are overwhelmingly
betting on a decline. Paradoxically, that's often
a bullish signal because it means bearishness
is at an extreme. There's nobody left to sell.
I see. And other things like the short interest
ratio. That measures how many shares are being
sold short. If that number is extremely high,
it means there's a huge pool of future buyers
because all those shorts eventually have to buy
back the shares to close their positions. And
that creates upward pressure. They all try to
quantify the extremes of fear and greed. So to
pull this all together, to synthesize the takeaways
from this deep dive. Market movements are predictable,
but only in their structure. Exactly. We know
price action unfolds in these layers. The long
secular trend, the medium primary trend, and
the short secondary trends, that part is predictable.
But the timing, the velocity of those moves,
that's driven by crowd psychology, which consistently
works against the average person's best interests.
And the numbers give us the guardrails. We know
a bear market is that 20 % decline. A correction
is less than that. We know the average bull run
is long and powerful over eight years, while
the average bear market is short and brutal about
13 months. And that cycle of accumulation, buying
in fear and distribution, selling into euphoria
is just constant. That psychological cycle is
what makes it so hard. We're always fighting
that urge to follow the herd, the instinct that
causes the bubbles and the crashes in the first
place. It's the fundamental challenge. So what
does this all mean for the person trying to be
disciplined and well -informed? It means the
data can tell you about the structure and the
potential severity, how long a downturn might
last, how much you could lose. But it's your
handle on psychology that will determine your
timing and ultimately your success. And that
leads to one final provocative thought. The material
is crystal clear. We know a bull market ends
in widespread euphoria. We also know the technical
trigger for a bear market is that 20 percent
drop from the peak. The challenge is this. If
we are truly rational investors, we should be
selling aggressively during that euphoria well
before that 20 % drop confirms the damage. But
can the rational discipline of technical analysis
ever really overcome that fundamental human need
to ride the wave, to chase that incredible 458
% average return right to the very end? The real
deep dive perhaps isn't into the charts at all,
but into controlling your own behavior. And that's
something for you to mull over until our next
deep dive.