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Chapter 7. Volume Extremes, Volatility, ... > Market Tops: Calm Before the Storm; ...

Market Tops: Calm Before the Storm; Market Bottoms: Storm Before the Calm

As a general rule, stocks rise approximately 75% of the time and decline just 25% of the time. (Between 1953 and 2003, the Standard & Poor’s 500 Index advanced during 38 of the 50 years.) However, stocks generally decline at approximately twice the rate that they advance, so risks in the stock market, particularly for periods of less than a decade, might be greater than we imply by the ratio of the length of the periods of time that prices advance to the periods of time that prices decline.

Significant stock market advances frequently start with strong bursts of energy and thrust. However, upside momentum gradually diminishes as advances continue and ultimately vanishes as bullish trends come to an end. Initial phases of most (not all) bear markets develop in an orderly manner: One by one, industry groups lose strength as price trends of market indices roll over from a rising to a gradually rising, to a gradually falling, to a more accelerated decline as increasing percentages of industry groups simultaneously fall from favor.


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