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Bulls, bears, crashes, and those corrections

The months of July and August have been characterised by dramatic movements in markets, primarily downward but most recent upwards, and have brought back haunting memories of the market
decline of 2008 and 2009. Given the shift from generally mild movements to sharp ones, it is an appropriate time to contemplate the different market cycles and if history can be any guide as to what can be expected

A bull market is a prolonged period of rising prices that is associated with investor confidence and an expectation of future price appreciation. A secular market is a long-term trend that lasts 5 to 25 years and consists of primary trends, broad support throughout the entire market that lasts for years. In a secular bull market, prices move higher more than they fall with any setbacks being compensated for by subsequent increases in prices.

A bear market is a period of general decline in prices accompanied by widespread investor fear and pessimism. Typically negative sentiment feeds on itself in a vicious cycle. A 20 percent drop or more over at least a two-month period generally constitutes a bear market. In a bear market lower lows and lower highs are made, in contrast, higher highs and higher lows are characteristic in bull markets. In a secular bear market the dominant trend is downward and is one of wealth destruction.

A rally is a period of sustained increases in prices which can happen in either a bull or bear markets, known as a bull or bear market rally respectively. A bear market rally can begin suddenly and are often for short periods, with gains of 10-20 percent. A correction is a reverse movement in price of at least 10 percent. Corrections are generally associated with retracement of prices, a minor correction may retrace one third of the upward price trend, while a deep correction may retrace seventy-five percent. A crash on the other hand is when the market loses more than 10 percent in a few days, sometimes in a single day. A crash may follow an extended bull market where stocks have become significantly over-priced.

The dot.com bubble (chart below), occurred from 1995-2000. The NASDAQ peaked intra-day at 5,132.52 in March, 2000 but eventually lost 78 percent of its peak value by October, 2002 closing at low of 1114 and wiping out US$5 trillion in market value.

Panic selling is wide-scale selling based on pure emotion and fear, rather than fundamentals. Capitulation is considered the point in time where investors can no longer tolerate losses and give-up, typically panic selling to get out of the market. This normally involves extremely high volume and sharp declines and is thought to be the time where the best bargains are available as everyone who wants to get out, has sold.

It is best to look at cycles in historical context. Markets on average have a negative return 1 out of every 4 years. In terms of up years and down years over the last 50 years, the S&P 500 has been up 72 percent of the time. In the US the stock market has increased 11 percent annually during the last 100 years. From this perspective, a longer term view is more reassuring and may ease the pain of short-term turbulence.

Anthony Galliano is chief executive of Cambodian Investment Management. anthonygalliano@covenantim.com

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