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The market cycle's four phases
The market cycle has four phases: a bull market, a bear market, a correction, and a bear market. In the bull phase, the economy is in growth with low unemployment and inflation. This leads to high levels of investment which subsequently leads to high stock prices. In the bear phase the economy is in decline with high unemployment and inflation. The prudent investor will sell out of stocks because of the lower future returns on stocks at this time.
All aspects of life have cycles, ranging from the very short-term, such as the life cycle of a June bug, which lasts only a few days, to the billion-year life cycle of a planet. Regardless of the market, it always goes through phases and is cyclical. As they increase, the peak, they fall, and eventually they reach their lowest point. At the end of one market cycle, the next begins. Following are the four main components of a market cycle and how to identify them.
1. Accumulation Phase
After the market bottoms, innovators (business insiders and a few value investors) and early adopters (clever money managers and experienced traders) begin to buy, believing that the worst is behind them. Although prices are very attractive at this point, the market sentiment remains gloomy. Media reports report that those who had been long during the worst of the bear market have recently given up and sold the rest of their holdings out of disgust. Prices have levelled in the accumulation phase, and for every seller who throws in the towel, someone is willing to pick it up at a bargain. Market sentiment begins to shift from pessimism to optimism.
2. Mark-Up Phase
For some time, the market has been stable, and now it is starting to move higher. More and more early adopters have taken up the cause. The technicians included in this group recognize that market direction and sentiment have shifted as the market makes higher lows and higher highs. Despite media reports that the worst is over, unemployment continues to rise, and there are reports of layoffs in many different industries. The fear of missing out on the market gives way to greed and the fear of being left behind as this stage progresses.
3. Distribution Phase
In the third phase of the market cycle, sellers gain control of the market. A mixed sentiment characterizes this stage of the cycle as the bullish feeling from the previous phase gives way to a mixed feeling. There might be periods of time when prices are restricted to a trading range. As the Dow Jones Industrial Average (DJIA) peaked in February 2020, it traded down to a level near its previous high and stayed there for several months.
4. Mark-Down Phase
Those who are still holding their positions endure the most agony during the fourth and final phase of the cycle. The value of many people's investments has dropped below what they paid for them, making them act like a pirate who falls overboard carrying a bar of gold and refuses to let go in hope of being rescued. Those who bought during distribution or early markdowns only give up or capitulate after the market has dropped 50% or more. The market is approaching a bottom, which is, unfortunately, a buy signal for the early adopters. Unfortunately, it will be new investors who will purchase the depreciated investment during the next accumulation phase and reap the benefits of the subsequent mark-up.
1. Accumulation Phase
After the market bottoms, innovators (business insiders and a few value investors) and early adopters (clever money managers and experienced traders) begin to buy, believing that the worst is behind them. Although prices are very attractive at this point, the market sentiment remains gloomy. Media reports report that those who had been long during the worst of the bear market have recently given up and sold the rest of their holdings out of disgust. Prices have levelled in the accumulation phase, and for every seller who throws in the towel, someone is willing to pick it up at a bargain. Market sentiment begins to shift from pessimism to optimism.
2. Mark-Up Phase
For some time, the market has been stable, and now it is starting to move higher. More and more early adopters have taken up the cause. The technicians included in this group recognize that market direction and sentiment have shifted as the market makes higher lows and higher highs. Despite media reports that the worst is over, unemployment continues to rise, and there are reports of layoffs in many different industries. The fear of missing out on the market gives way to greed and the fear of being left behind as this stage progresses.
3. Distribution Phase
In the third phase of the market cycle, sellers gain control of the market. A mixed sentiment characterizes this stage of the cycle as the bullish feeling from the previous phase gives way to a mixed feeling. There might be periods of time when prices are restricted to a trading range. As the Dow Jones Industrial Average (DJIA) peaked in February 2020, it traded down to a level near its previous high and stayed there for several months.
4. Mark-Down Phase
Those who are still holding their positions endure the most agony during the fourth and final phase of the cycle. The value of many people's investments has dropped below what they paid for them, making them act like a pirate who falls overboard carrying a bar of gold and refuses to let go in hope of being rescued. Those who bought during distribution or early markdowns only give up or capitulate after the market has dropped 50% or more. The market is approaching a bottom, which is, unfortunately, a buy signal for the early adopters. Unfortunately, it will be new investors who will purchase the depreciated investment during the next accumulation phase and reap the benefits of the subsequent mark-up.
Oct 15, 2021 00:37