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Expert Answers to Biz Questions Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.
What are Market Cycles?
Market cycles, or stock market cycles, is a wide term that refers to patterns or trends which emerge during various business environments or markets. During such cycles, some asset classes or securities tend to outperform others as their particular business models align with conditions that allow for growth. These are the periods between the two latest lows or highs of a benchmark that's common like the S&P 500, which highlights the performance of a fund through up and down markets.
Just about everyone has heard of a market bubble, and you probably know someone that's been caught in one. While there are lots of lessons that can be learned from previous bubbles, those who participate in the market still tend to get sucked in every time a new one occurs. Bubbles are just one of the multiple market phases, and those who want to avoid being caught off guard must understand what those phases are. But knowing how the markets work, each one of the phases of the market cycle while having a grasp of technical analysis can help you recognize the market cycles. Working with an economic damages expert can also help you gain a better understanding of market cycles.
Markets move in four major phases, from the accumulation phase which means the market has bottom to the markup phase where it seems to have leveled, followed by the distribution phase with choppy prices and sellers prevailing and the markdown phase when early adopters are looking for signs of a bottom to get back in while laggards are trying to sell and salvage whatever they can.
After the Market Bottoms: Accumulation Phase This part of the cycle occurs after the market has bottomed. Early adopters like experienced traders and skilled money managers along with some value investors and corporate insiders, start to buy with the thought the worst has ended. Valuations look attractive while the market sentiment is bearish. The media is preaching gloom and doom, while holdings are sold and people endure the worst of the bear market, but prices begin to flatten in the accumulation phase. Many sellers may be throwing in the towel although there is always someone out there who is picking it up at a significant discount. The sentiment among the overall market is beginning to switch from negative to neutral.
Market Is Stabilizing: Markup Phase The market is stabilizing and has been for a while during the markup phase. It starts to move higher while some, like technicians, get on the bandwagon, recognizing market direction and changing sentiment. The media is now talking about the worst being over although there are still plenty of layoffs and unemployment is continuing to rise. As the markup phase starts to come to an end, there is more jumping in while market volumes are increasing substantially. Insiders and smart money are unloading as the late majority gets in. When prices start to level off, those who've been waiting it out on the sidelines look at this as the ideal buying opportunity. Things are moving from neutral to bullish.
Sellers Dominate: Distribution Phase Sellers start to dominate in the third phase, with bullish sentiment now becoming mixed and prices frequently stay locked in a period that may last several weeks or months. When the third phase ends, the market reverses direction. It's an emotional time for investors with many settling for breaking even or small losses.
The Final Markdown Phase The cycle's final phase is especially painful for those holding positions, with many hanging on as their investment is now below what they paid for it. They're refusing to let go in hopes of it somehow being rescued. For early innovators, it signals this is time to buy and that a bottom is imminent. When the market plunges 50 percent or more, many who bought during the early markdown phase are giving up. New investors who purchase depreciated investments during the next accumulation phase are able to enjoy the next markup.
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