Dow Theory classifies stock markets into bull markets (major uptrends) and bear markets (major downtrends), which are intrinsically linked to economic prosperity and recession in economics. Dow Theory posits that the economic environment determines stock market conditions - economic prosperity breeds bull markets while economic downturns spawn bear markets. During bull markets, economic indicators such as unemployment rates, price indices, and average national income all show positive trends. Citizens enjoy higher incomes, strong consumption power, and high investment willingness, naturally leading to overall market optimism.

Conversely, during bear markets, all economic indicators reflect recessionary conditions - high unemployment, deflation, weak consumption power, and declining average personal income. These negative factors manifest in the stock market as a sustained downward trend.

Economies operate cyclically: prosperity inevitably gives way to recession, and recession eventually births new prosperity. These economic cycles give rise to corresponding stock market cycles, creating the alternating phenomenon of bull and bear markets described in Dow Theory.

Bull and Bear Markets Cycle Perpetually

Dow Theory maintains that bull and bear markets are mutually exclusive opposites. However, both have distinct beginnings and endings. The start of a bull market marks the end of the preceding bear market, just as the emergence of a bear market signals the conclusion of the previous bull market. These markets continuously alternate - when a bull market ends, a bear market invariably takes its place; when a bear market concludes, a bull market inevitably returns. This perpetual "bull to bear, bear to bull" rotation creates an unending cycle in stock markets. Although market indices generally trend higher over time, once stocks peak and decline, the bull market must die and a bear market must emerge. After the bear market completes its course, a new bull market returns - typically driving stock prices and market indices to surpass previous highs. Yet no matter how high a bull market pushes valuations, it cannot escape its eventual demise and replacement by a bear market.

Similarly, no matter how severe a bear market's decline - even if indices fall below previous bear market lows - it too must eventually end.

Thus bull and bear markets form an eternal cycle in stock markets, mirroring economic cycles where neither prosperity nor recession lasts forever. Stock markets are governed by economic cycles: prosperity breeds bull markets, recession spawns bear markets. Since economies cycle endlessly between expansion and contraction, stock markets correspondingly oscillate perpetually between bull and bear markets without cessation.