What a difference a year makes. In 1996, despite some pitfalls, the Dow managed to break through and close above 6,500, continuing its seemingly endless upward march.
Even if you're not a member of the Sierra Club, the names of certain animals may linger on your lips: With the market so bullish now, can bears be far behind? Whether you classify yourself as bullish or bearish, one thing holds true: Knowing when to buy or sell is as important as knowing what to buy or sell.
For stock investors, the past two years have seemed like a fairy tale; even the ugliest duckling turned into a swan. As stock markets climbed to new highs, creating vast sums of wealth, investors barely noticed the passage to the next round number. Pundits urged them on with projections of the Dow Jones industrial average at 7,000 by 1997 or 10,000 before the end of the century. Others urged caution, citing the Newtonian theory of the stock market: What goes up sooner or later comes back down . . . even if only briefly. The question remains, which animal will end up on the endangered list--bulls or bears?
Predictions of stock performance and investment timing are based on a myriad of indicators, from the style of women's fashions (shorter hemlines and higher heels are considered bullish) to the level of consumer debt (high debt is considered bearish). Making sense of the movement of stocks is tough enough, but to predict the market's next move, you may want to rely on your fairy godmother.
There are two general approaches to timing the purchase or sale of securities:
*Fundamental analysis uses information on economic growth and industry and company statistics to estimate the value of an individual security and the valuation of the market. Information is often gleaned from annual reports and studies of a company's earnings, dividend yield and its price compared to its earnings.
*Technical analysis relies on the assumption that stocks trade in definite and predictable patterns. The most popular type of technical analysis involves charting a stock price's movement and looking for trends that will enable you to predict future market movements.
If you're used to talking about bull and bear markets, you're already familiar with the charting aspect of technical analysis. The use of the terms bull and bear to signify different movements of the equity markets probably started with the advent of the Dow theory, one style of technical analysis named after Charles H. Dow, an editor of The Wall Street Journal during the early 1900s. Although originally designed to predict changes in business activity, the Dow theory has become popular as a way to forecast stock market activity.