Most people know someone who has gotten caught in a market bubble. Bubbles occur in all markets. In the financial industry, stock market bubbles trap owners, forcing them to make a financial move, leaving them with either profit or loss. The stock market works in cycles. The process of a market cycle goes up, peaks, then shifts down, eventually bottoming out. When one cycle finishes, another begins. A good investor or financial knows how to navigate the stock market through cyclical analysis . With a strong grasp of technical analysis and an understanding of how the market works, a good investor can recognize market cycles and get the most return on your investments.
Maximize Investments with Cyclical Analysis
Whether you are investing a small or large amount of money, your goal should be to maximize your investments or trading returns. The easiest way to do this is to understand the cycles involved in the market. The process of market cycles can be broken down into four separate phases.
During the accumulation phase, experienced traders and corporate insiders begin to make purchases. After the market bottoms, strong investors assume the worst is over. At this point, valuations are very attractive. Most shareholders who have lost money during the drop get frustrated and sell off all their holdings in disgust. Prices flatten, sellers are fed up and looking to get out from under their investments. This is a great opportunity for seasoned investors to pick up healthy discounts on stocks. As the phase goes on, the sentiment switches from negative to neutral.
The mark-up phase comes after the market has been stable for a while and begins to show a shift towards higher prices. As this phase matures, more people begin to jump on the band wagon to become shareholders. While the accumulation phase is plagued by fear, the mark-up phase sees a shift towards feelings of greed as early investors begin to see a return on their investment. Valuations soar beyond historic norms as market values increase exponentially with last minute investors jumping on board.
At some point the prices level out. As the rise in valuations slows down, another jump in purchasing is seen as investors look at the price leveling as a buying opportunity. Smart investors begin to sell their shares at this point. The technical analysis shows a selling climax as prices are at their peak. This is the top of the bubble. The sentiment at this point switches from neutral to bullish as investors are optimistic.
During the distribution phase, sellers dominate the market. The bullish sentiment turns to mixed sentiment as they understand that the decline is imminent. Prices stay locked in the trading range for a period of time. When the timing is over, the market shifts to the opposite direction and begins to decline. This is an emotional time for investors as they experience a range of emotions from greed and hope to fear.
Valuations are extreme during the distribution phase. For those who have no sold their shares, many investors will settle to break even. Those who have held on to hope and greed will even be happy with a small loss as the share continues to see a decline.
The mark-down phase is the most painful for shareholders. Many inexperienced or new investors will hold on to their shares because of the imminent loss. After a loss of 50% or more, even the stragglers will give up. This is a buy signal for early innovators. It is also a sign that the bottom is imminent. As the cycle ends with the mark-down phase a new cycle begins with experienced investors and corporate insiders jumping on board.
One of the hardest parts of cyclical analysis is that a cycle can last weeks or years. When you hire a professional, certified financial advisor, they will be knowledgeable on how to recognize the different parts of the market cycle. This will help you to take advantage of the profits and maximize your investments for the greatest return.