The current generation lives in an era in which phenomena called ‘market trends’ and ‘market forces’ dictate the terms of the operation of national economies. It all started in the aftermath of the introduction of perestroika and glasnost by the last Soviet premier Mikhail Gorbachev. Both the policy packages, while meant to reform the inherent deformations, dependencies and vulnerabilities of a closed communist economy, in effect exposed the very contradictions of the Marxist economics theory. This was followed by a series of uprisings against the autocratic Soviet power, the fall of the Berlin Wall being the single most monumental revolt against Russian oppression. This, not surprisingly, led to the further weakening of the Soviet economy and ultimately culminated in the fall of the Union of Socialist Republics.
Though the soviet power was indeed based on oppression of the economic and political rights of its block, it was the only alternative model of economic organization to have challenged the American order. The resultant, New World Order brought with it the inconsistent and volatile system of market controlled economy wherein the larger populace was left exposed to the market machinations of the corporate sector. Even in India, ‘market trends’ have become the main drivers of the income generation capacity of our industrial and service sector and the multitude of small and medium investors are perilously left at the mercy of the same trends. Hence it becomes necessary for them to understand the contours of share market investments and learn to manage during the Bear Market period.
Bear Market: Meaning and Scope
Before delving into the more detailed term of Bear Market trend, it is absolutely essential for investors to understand the true meaning and nature of the term ‘market trend’ as well as different types of its short and long term variants. The term ‘market trend’ is somehow vaguely defined. It is the supposed streak within a financial or more particularly a stock market to move in a particular direction. In simple words, it is an apparently predictable price tendency in a share market depending upon the market situation.
Now market tendencies can be broadly classified into ‘secular market trends’ for long term time spans, ‘primary market trends’ for medium term time spans and ‘secondary market trends’ for short term time spans. A secular market trend lasts for a period anywhere between 5 to 25 years and constitutes of a number of primary trends. On the other hand, primary trends lasts for one year or more, whereas, secondary trends last for a few weeks or a few months.
Bear Market is a type of primary market trend. It is characterized by a general decline in the share market for successive trading days during which investors’ confidence and willingness to pump in money in the stock market is replaced by widespread and self sustaining fear of losing profit/ investments and pessimism on the part of investors. As the prices of stocks and securities come down, the pessimism within the investor’s community further grows and reinforces the tendency to avoid making large investments and taking risks. This, in effect, results in the arrival and settling in of a bear market scenario. Bear Markets are usually the result of recession, industrial slowdown or stagnation, continual inflation and a high rate of unemployment. The worst bear market situation is said to be the 1930s Great Depression which lasted for a significant amount of time and wrecked havoc on the American as well as European economies. The legend has it that the term ‘Bear Market’ has its origins in the business behaviour of skin traders who sold off bear skins in order to avoid losses due to future reduction of prices.
Bear Market: Implications for Investors
Bear Market is an extremely dangerous time for investors. While established shareholders have a slight chance of wriggling out of the situation without monumental losses, new traders tend to get affected badly because of it. It is necessary to make a distinction between a bear market situation and a ‘correction’ within the market. When the prices of stocks fall for a short period of time and then appreciate for a long time; it is called a ‘correction’. Whereas a correction is deemed to be a great entry time for new investors, doing so in a bear market situation can be immensely problematic.
Hence it is necessary for all investors to understand the logic and operation of bear market trends and guard against making intemperate decisions during such periods.