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What Is a Trending Market?

Stock investors attempt to generate money by purchasing stocks at low prices and selling them at high prices.
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  • Written By: K. Kinsella
  • Edited By: Shereen Skola
  • Last Modified Date: 11 August 2014
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A trending market is defined as a period of time during which a stock market or other type of securities index appears to be moving in a particular direction. When the stock market is systematically rising in value then analysts usually refer to the market as bullish while a bearish market is one in which asset prices are trending downwards. Brokers and investors attempt to capitalize on trends while analysts monitor market activity to determine the overall health of the economy.

Stock investors attempt to generate money by purchasing stocks at low prices and then selling those same securities for much higher prices. During periods of economic growth, banks lower lending standards and credit becomes more readily available. This usually leads to a bullish sentiment and as large numbers of people compete for stocks and securities, the imbalance between supply and demand causes the prices of these securities to rise. Various indexes track the average price of securities from one day to the next and many investors review these indexes for evidence of a trending market. Investors try to capitalize on a bullish market by purchasing stocks while prices are still rising, then selling those securities before prices start to fall.

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While many investors tend to look for signs of a bullish trending market, others take advantage of bearish markets by purchasing put options. These contracts involve one party agreeing to buy a security from another investor for a specified price on a future date. If market data suggests that prices are likely to keep falling, a bearish investor may purchase a put option contract so that he or she can lock in a sale price based on the current value of a security and then sell the item for that price in the future even if the market value of the instrument drops. Additionally, rather than buying based on a trending market, some investors buy and sell securities in opposition to market trends. If prices seem set to rise beyond a reasonable value, an investor may view that trending as evidence of a market bubble and sell his or her assets before the bubble pops and the prices crash.

Analysts employed by government agencies and private firms monitor the markets to see how fiscal policies are impacting the economy. During periods of recession, a government agency may lower interest rates so as to encourage the spending that is needed to spur growth. After making such a move, analysts will monitor market trends to see if the policy decision had any impact on the market activity. A resurgent stock market is often the first sign of an economic recovery.

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