Understanding the Stock Market Cycle

Understanding the Stock Market Cycle

Market cycle is the most important part of stock market. It represents the different patterns which emerge during different business environment.

It is generally an economic trend observed by any business or industry due to underlying market conditions. During these cycles, the revenue and profitability of the company is affected and may exhibit similar pattern as of industry. Market cycle is basically repetitive in nature, which means the end of first phase is the start of new phase.

Generally, there are four phases of market cycle. At every stage, stocks behaves according to prevailing market cycle. For instance, during at IT boom, company selling software and solution will exhibit the high growth rates. Likewise, securities will act differently with respect to different market conditions. Hence understanding of these cycles is essential for the investor to maximise the returns.

Below are the four major phases of market cycle.

Phases of market cycle namely:

  1. Accumulation Phase
  2. Mark-up Phase
  3. Distribution Phase
  4. Mark-down Phase

Accumulation Phase:

This is the first phase of market cycle. This phase begins at the end of previous market cycle. At this time, the market has bottomed out and the valuations look very attractive. This is the phase where the early buyers, institutional investors and experienced traders start to buy thinking that the worst is over. During this period, the market sentiments changes to neutral from being negative.

Mark-up Phase:

This is the second phase of the market cycle. During this phase the market is stable and in the state of consolidation. As the stocks began to raise gradually, large number of buyer participate in the market to take advantage of the rising trend. At this stage, market changes the sentiments from neutral to bullish. As this phase is at its peak, more and more investors jump into the market supplemented by extreme greed and fear of missing out.

Distribution Phase:

In this third phase of market cycle, the market experiences pressure from the selling side.  During this phase the market sentiments changes from bullish to neutral. Market moves in a range and stock prices remain stable. Markets are at peak and the valuations are extreme. Greed and fear emotions of investors appear to be taking off again. Distribution phase may last from few weeks to few months.

Mark-down Phase:

This is the final phase of the market cycle. At the end of distribution phase, market reverse its direction. Investors and traders start selling and booking profits which forms a chain reaction. Market sentiments turn bearish and it experiences huge sell-off. Stock prices fall way below the buying price of the investors.

Being the last phase of the market cycle, it is the great time to buy the securities as the securities are available at cheap valuations. Also as the end of mark-down phase marks the beginning of the accumulation phase.

Below is the graph representing the market cycle:

The Bottom Line:

Understanding the phase of market cycle allows investors to forecast the upcoming moves of the market and take an informed decision on the investments. Although the prediction of the end of market cycle will not be accurate, understanding them does benefit the investors.

For the wise investor, accumulation phase where the market sentiments are negative to neutral is the ideal time to invest. This is because good companies are available at cheap prices.  Also, as the investment is long term, mark-up phase fetches good returns to the investors who had invested during accumulation phase.

SEBI Registered Investment Advisor ” Brighter Mind ” has the expertise in finding the valuation of the company and actively managing the portfolio according to the market cycles. This ensure better returns and higher margin of safety to our clients.