Market cycles: everything you need to know

A market cycle refers to the process where the bull markets develop right from start to end. Then they go back to the bear market so the bull market excesses are corrected. Ever since market speculation started, such cycles have emerged and are compared to each other often. Though two market cycles hardly look the same or have the exact same underlying factors which drive them, they typically behave the same in each part of the cycle because of human nature and market psychology. Visit multibankfx.com

Most of them run their course and come under the ‘normal’ bull & bear market cycle zone, whereas many others in the same category would have turned into full-blown bubbles that may even lead to market crashes.

What differentiates the two is the magnitude with which the underlying asset’s price increases and how the investor sentiment increases with respect to it. Below are the different phases of the market that one may find useful:

Bull market

• Discovery phase

This phase indicates the start of a strong bull market trend that most of the market participants fail to notice. This period marks the end of the last bear market and the new bull market ushers in but it does not become obvious until the cycle advances.

Stages & Characteristics:

• *Duration – This covers about 25% of the cycle.

• Accumulation – Smart investors are able to spot emerging trends and hold onto them as they await a new bull market.
• Trend emergence – This is indicated by a slow but consistent bullish price sequence of higher highs and higher lows.
• Shake-out – The initial rally diminishes which leaves things ambiguous and often slips away from weak traders.

• Momentum phase

This is when the trend becomes apparent in the larger market and sees more participants as more and more people get to know about it.

Stages & Characteristics:

• *Duration – It is conventionally the longest part of the bull cycle which accounts for nearly 35% of the cycle.
• Momentum builds – This is when more people become aware of the underlying bull market and the market sentiment gets a boost from a healthy trend.
• In the beginning of this phase, there are just sophisticated investors in the market but as the trend picks up, more and more of the inadequately informed crowd chimes in.
• First sentiment extreme – The overall attitude towards the market is positive and well capable of keeping up a solid trend but the market sentiment doesn’t turn moderately extreme until the end of the phase.
• Bear trap – Concerns with respect to overvaluation and an ending cycle lead to a market correction. But the dip concludes with a new set of buyers and also creates a base for the following cycle.

• Blow-off phase

Bull market’s most active and violent phase which witnesses the largest participation where least informed investors also join. The behavior of market participants’ behavior begins to turn irrational causing the trend to be unsustainable in a sudden manner.

Stages & Characteristics:

• *Duration – Makes up the final 10% of the bullish part of the cycle.
• Renewed optimism – Market participants become confident about the market following the previous correction which makes room for new highs in the cycle.
• FOMO – ‘Fear of Missing Out’ kicks in as the trend picks up. In this phase, the most uninformed market players also come into the picture.
• Euphoria –  This is when several market players feel that the past rules of market cycles need to be pushed away as this calls for a new strategy at a new time.
• Investor rationality is negligible in this violent part of the market phase. This is when the pieces are at their peak in a small time frame.
• ‘Smart Money’ exits – A number of smart money managers keep exiting the market in this cycle but still you will come across several sophisticated hedge fund managers who continue the chase.

Bear market

• Transition phase

A major turning point shapes up in this period as the market cycle moves from bullish to neutral to bearish. It is a tug-of-war of sorts among buyers and sellers who keep going to and fro between the pessimistic possibility of the market falling or staying optimistic and expecting it to continue increasing.

Stages & Characteristics:

• *Duration – The smallest part of the cycle which does not last for more than 5% of the process
• Shot across the bow –  It is the first significant fall after the blow-off phase that acts as a warning indicated by a quick and bulk sell-off.
• Bull-trap – The rally which follows the first fall from the peak of the market gives a false implication that the sell-off was simply a sharp, yet healthy correction.
• The Lower-high– The pressure to buy moves away as people begin to sell. The market operates in a different way once it has been corrected by stalling and creating a key lower-high.
• A significant turning point in market psychology. There is both the optimism that the market will move up and the doubt that it would not.
• Breakdown – A top’s confirmation begins here before the low that comes from the ‘shot across the bow’ breaks. It turns into the highly damaging part of the cycle as a major reversal of fortune gains momentum.

• Deflation phase

It is essentially the market reversing and giving up the excesses of the bull market as it moves towards the bear market in UAE.

Stages & Characteristics:

• *Duration – Though it accounts for about 25% of the total cycle, it could keep varying as the cycle could carry on for several years.
• The purging of excesses that were developed in the bullish market phases.
• Fear and capitulation – This is when the market changes as people realize that the bear run has begun. Losses become apparent since people start selling rapidly causing the prices to fall.
• Bottom fishing – After bearing enough loss, investors eyeing at value search for a bottom only to fail.  The tussle among value buyers and residual sellers incurring losses makes the market shift to lower and lower prices.
• Despair, end of bear –  This is the market at its lowest when the market losses are at their height. Even residual selling ends and market participants keep blaming each other.