Mastering the market cycle psychology. It may not be entirely predictable, but there is certainly a pattern. We tend to see market downturns about every 5 to 10 years.
But depending on how detailed you want to look at an investment, the cycle can happen much more frequently than that.
Some investment strategies try to take advantage of that.
Today we will discuss the four phases of the market cycle and what they mean for us as investors.
Trading Psychology of 2023: Update June 2023
Table of Content
- What is the psychology of the market?
- What Are the 4 Market Cycles?
- What is the meaning of market psychology?
- Psychology of the market book
What is the psychology of the market?
Market psychology is the belief that every movement in a market is the result of the emotions of its participants
Market psychology refers to the prevailing behaviors and general mood of market participants at a given point in time.
The term is often used by financial media and analysts to explain market movements that cannot be explained by other measures, such as fundamentals.
This idea leads to a different kind of analysis when looking at markets and their graphical representations – that’s, price charts.
What Are the 4 Market Cycles?
Accumulation
The first phase of any market cycle is the accumulation phase.
The main characteristics of this phase are that the market has bottomed out and early investors such as speculative investors sense an opportunity.
Value investors who value what their indicators are telling them and insiders or just other smart investors start to slowly buy back in.
At this point, they are often seen as contrarians in the general investment community,
as the general sentiment is understandably still quite bearish.
After all, the accumulation phase does not begin until the market bottoms out.
While there are some indicators that suggest that the worst may be over, this is far from a certainty,
considering that unemployment usually remains relatively high during this phase and sometimes even rises.
Add to this the fact that GDP is declining, if not negative, and that news preaching doom appears almost daily during this period.
An example of this accumulation phase in action is the S&P500
in September 1974, the S&P500 had just bottomed out after the stock market crash of the early 1970s and was at about $65 per share.
No one knew for sure at that point that a rally was about to begin.
By January 1976, the market would rise to over $100 per share.
Market Condition
Many people wouldn’t have suspected that at the given time.
The other relevant statistics that surfaced in the news showed that the market was down about 46%. the thighs set in December 1972.
Unemployment had been creeping up over the past year, from 4.6% in 1973 to 5.9% in September 1974.
Unemployment was still relatively stable at 7.9% in January 1976.
By the time the markets broke through the 100 mark once again
year-on-year real GDP growth had fallen from almost 7 in the last quarter of 1972 to negative 0.6% in the third quarter of 1974.
It fell even further to minus 1.9% in the fourth quarter and minus 2.3% in the first quarter of 1975
This pattern was repeated during the crash of the early 1980s,
when the S&P500 reached a new high of 140 in November 1980 before falling to about 107 by July 82.
over the next five months, the share price climbed to a new all-time high of nearly $141 and continued to rise from there.
Such an outcome didn’t seem very likely in July, when unemployment had risen from less than 6% at the end of the 1970s to about 7.5% in November 1980.
By the end of the year, when the market reached its new all-time high,
it would take another 7 months for unemployment to fall below the 10 mark, and almost 1.5 years for it to fall below the 7.5% mark we’d seen at the market’s previous peak.
Lagging by the market
You may now say to yourself that GDP growth and unemployment are lagging indicators,
The stock market is forward-looking, that’s one of the reasons we see such a decoupling between the two, and that’s true.
But you’d be surprised how easy it is to forget that in the heat of the moment,
especially with the benefit of hindsight.
In general, the accumulation phase looks like this:
It starts with the market value bottoming out and becoming more attractive again,
so early investors slowly start getting back into investments.
They are in the minority because the general mood of the majority of the investment community is still quite pessimistic.
Over time, lagging statistics begin to catch up with the market, and views change from negative to neutral,
signaling the transition into the second phase of the market cycle.
Mark – Up
The second phase of any market cycle is the markup phase. this is probably the most fun phase of any cycle for an investor.
Early segment
It is split into three segments the early, mid, and late markup phase.
The primary characteristic of the early segment of a markup phase is a market that has experienced some stability and growth.
Primarily off the back of the late accumulation phase with the early majority of investors such as the technical investors beginning to jump on the bandwagons.
As a result, growth begins to speed up but nothing’s too alarming yet the media begins running stories discussing the possibility that the worst may be over.
Unemployment still remains relatively high and there are still potential reports of new layoffs coming in from certain sectors of the market, so there’s still some uncertainty.
MidSegment
The middle markup segment is characterized by a change in market outlook.
In the accumulation phase, the outlook was mostly bearish and eventually became neutral.
In the intermediate markup phase, the outlook shifts toward an uptrend, and as a result, some things usually happen.
First, the late majority of investors jump on the bandwagon, and prices continue to shoot up.
Second, because of this, some of the more speculative investors who got the ball rolling in the accumulation phase begin to take their profits and sell out of the market before prices get too high.
Third, greed is slowly beginning to outweigh fear for most investors,
resulting in the late markup segment being characterized by a short period.
Prices are starting to level off, or at least slow down.
Those investors who have either stayed on the sidelines by choice or because they have stayed out of the investing world due to previous downturns are now starting to get involved.
This often includes the neighbor who is so happy to give you stock tips.
As a result, we usually see a comparatively massive and rapid upswing in share prices, because basically everyone.
The most active and savvy investors invest as much money as possible for fear of missing the next big move.
At this point, the outlook for the market goes from optimistic to downright euphoric.
perhaps the best-known recent example of the appreciation phase took place in the 1990s.
At times, one had the impression that it was almost impossible to make money on investments.
Mark-up ( market cycle example)
In October 1990, the S&P500 closed at about $304 per share. Next year In December 1991 it passed the 400 mark,
and in March 1995 it passed the 500 mark, in February 1998 it passed the 1000 mark,
and at the end of the decade, it was close to $1500.
The accumulation phase began in 1990, the market was still away from its previous highs, but the downward trend began to reverse.
between 1992 and 1995 we experienced a period of slow but steady market growth, as we would expect.
In the early markup phase from 1995 to 1997, a noticeably faster growth line emerges as the outlook becomes more optimistic and more investors enter the markets.
In September 1997, the S&P 500 closed at about $1500 per share.
Over the next year, it went up and down a bit, but still around $1500 per share.
Mark-up
This time, greed and the fear of missing out really begin to take over as more and more people begin to rush into the markets,
leading to the characteristic sign of the late markup period.
That was the last big upswing for the urine change in this case that closed out the millennium.
Since we know that market cycle we also know that no upswing can go on forever.
Distribution
let us move on to the third phase of the distribution.
The third phase of any market cycle is the distribution phase,
and the main features of this phase are that sellers begin to dominate.
The optimistic and possibly even euphoric outlook of the late upswing phase is slowly beginning to dissipate.
It is not uncommon to see so-called double or triple tops in the market.
In this phase, a double or triple top is a short period of time when the prices of a market are close to their previous high, sometimes even slightly exceeding it, but not really exploding anymore.
The distribution phase is characterized more by the transition from euphoria to the bear market than by the actual depth of price losses, so it is a very emotional time for investors.
Frequent shifts between fear or hope and occasionally even greed, as it sometimes looks like the market is going to take off again.
The duration of this phase is also unpredictable, as it can vary greatly from market cycle to market cycle and from market to market overall.
Given this, it should surprise no one that many investors bail out during this period, hoping to break even or at least avoid a potentially significant loss.
Markdown
The fourth and final phase of a market cycle is the markdown phase, and it’s undoubtedly one of the most painful times for an investor, as this is when most of the price declines occur and sentiment naturally becomes very bearish.
if you’re an active trader, you regret not selling your investments early enough,
and if you’re still in the market, you may try to hold on to your investments for a while, hoping for a bounce.
In most cases, as the market continues to fall, many active investors will eventually abandon their investments and take the loss.
if you’re like me, a more passive investor who buys and holds, ask yourself if this time will be different and if a recovery is really around the corner.
Fortunately, history has shown that as difficult and painful as the markdown phase can be, there is always an accumulation phase that eventually comes around the corner.
Eventually, prices reach a point where speculative and value investors are ready to jump back in.
it’s all part of the economic machinery. As an active investor, it is therefore important to keep an eye on the other markets that are available to you, as they may not be in the same phase as the market in which you are currently invested.
For a passive investor like myself, it is important to focus on what we can control, such as continuing the budget and continuing to invest.
At some point, the tide will turn again, and we want to make the best of it when it does, but that’s it for today.
What is the meaning of market psychology?
Marketing psychology is roughly defined as “incorporating a set of psychological principles into your content, marketing, and sales strategy”.
Going further, marketing psychology can also be seen as a way to look for patterns in people and assess how they relate to their buying decisions.
Marketing psychology is the branch of marketing responsible for finding out consumers’ needs,
motivations, and preferences. With this knowledge, marketers can develop products that fit these studies.
Applying psychology to marketing strategies helps various marketing departments know how the human mind works and satisfy its needs.
In psychology, there are various techniques and tools to predict consumer behavior, including neuromarketing. Using these strategies, companies around the world can develop products that are tailored to the needs of our customers.
If you’re a business and you want it to succeed, you need to know the psychology of marketing.
Psychology of the market book
Trading is as much about psychology as it’s about developing a solid strategy. Without the mental strength to stick to a plan, the best strategy in the world is of no use. Good traders not only develop and master a strategy but also become aware of and develop their own traits such as discipline and patience, which allows them to implement their strategies more effectively.
A number of books can help traders understand how psychology works in investing. here are 3 examples:
 Mastering the Market Cycle – Buy it now! |  The mind of the market – Buy it now! |  Psychology of the stock market – Buy it now! |
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