Lions.. this is a section taken from my book, A (NOT) So Random Walk On Wall Street which covers market cycles. I hope that this helps you better understand the market.
Market Cycles. Earlier in this book I covered market sectors and sector rotation, now I will break down market cycles into four phases. Market cycles, business cycles, stock market cycles, etc. all complete four distinct phases. They all rise, then peak, subsequently dip, and then finally bottom out. These phases follow each other sequentially and are therefore not random. When one market cycle ends, the next one simply begins. Keep in mind that market cycles will invariably have differing lengths, and can each play out dramatically different, but that still does not change the fact that these cycles progress from one cycle to another in repeating patterns.
The Four Market Cycle Phases.
1. Accumulation Phase. During this phase, the valuation of either a particular asset, or even the entire market is low, which makes it attractive however, the general sentiment is still bearish. It is during this phase that institutional investors, or savvy traders begin to buy. The easiest way to capitalize on the accumulation phase is to “dip your toe in” so to speak. Open an initial position seeking to add to it as the asset moves in the expected direction.
2. Mark-Up Phase. Here the market or asset is beginning to move higher and there are clear signs that investors are interested in owning the asset, or again the overall market. A good technical analyst will begin to recognize distinct patterns in the charts which further establish to him/her that sentiment has changed and are now positive.
3. Distribution Phase. In this phase of the market cycle prices are topping out, which will bring sellers in, who are either pulling profits, or others who are seeking the sell the asset short, (bet against the assets). This phase is complex because the sentiment is still bullish. Here asset prices can stay trapped in a trading range which can last for some time leading the way into the final phase.
4. Markdown Phase. This is the final segment of the market cycle, after which a new phase cycle will begin. In the markdown phase prices fall, catching many off guard which in turn leads to more selling until a “bottoming out’ occurs. Then, the entire cycle repeats. No matter what part of or sector of the market you are referring to, all of them go through the same phases and are cyclical, therefore they are not random. By far, most investors and traders fail to recognize that markets are cyclical. The understanding of cycles is essential, and simple, if you want to maximize your investment or trading returns.
For some reason I didn't get it this way when I read the book. Thank you
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