What is the Best Market Cycle for Canadian Investors?
Canada's Stock Market Cycles
We all know what market volatility can do to our investments. You cannot be sure of what is going to happen next. All you can do is envisage using your knowledge and understanding of the stock market.
The uncertain nature of equity often defines the value of your investment portfolio. In booming times, you will see all green caused by an increase in the prices of stocks.
In times of recession, you will always cover your losses. And on some days, protect your principal from getting wiped out!
But why does this happen? Can we study the market and time our trades accordingly?
Yes. Through study, we get educated about the different market cycles following which the stock prices move. Let us understand each other.
Why Study Canadian Market Cycles?
Based on trend analysis and years of study, we can typically divide the stock market into four different market cycles. Stock prices react differently in these phases.
If you know about them, you can better make investment decisions and time your trades with precision. It reduces your chances of predictions going wrong and helps you adopt a powerful trading strategy.
The Four Market Cycles
Phase I: Accumulation
We always need a starting point to begin any study. Let us start with a situation when the stock prices bottomed out and are available at a steep discount.
The intrinsic values of the stocks are attractive, and to earn higher profits. It attracts three different market participants are:
| Market Participants of the Accumulation Phase | Description |
| Corporate Insiders | The stock market reacts to the news, and no one is in a better place than the senior officers of a company who know all the secrets. This class has certain material information not available in the public domain. It helps them in making investment decisions. |
| Value Investors | They are usually industry veterans who know the art of timing and precisely understand the potential of every stock This class prefers to buy those stocks that are available at two-thirds of their intrinsic value They usually rely on: a) Performing the fundamental analysis b) Usage of technical indicators c) Interpretations of economic developments |
| Experienced Traders | They are not as good as value investors and are usually individuals trying to buy stocks at discounts They analyze trends using charts, such as candlestick charts, and make their buying decisions |
All the above market participants usually feel that the “worst is behind them,” and from here, the market will move north. Thus, they buy securities.
Phase II: Mark-up
The market forces of demand and supply drive the stock market prices. The participants of the accumulation phase trigger accelerated buying. There is strong selling as well.
In simple words, for every buyer who buys stocks, there is a seller on the other side, ready to square off the open position. Because of matched demand and supply, there is the least volatility at the beginning of this phase, and the stock prices are stable.
However, as time progresses, the buying pressure, or the number of “buy orders,” overwhelms the sellers. It causes the stock prices to move higher.
Everyone will buy the stocks as they feel they will increase in the upcoming trading sessions.
Phase III: Distribution
The buying wave is so strong in the mark-up phase that now the stock prices get locked in the “upper circuit.” The peak reached, and there are several pending buying orders, but most sellers are minimal.
You can make money only when–You buy cheap and sell dearer. This age-old mantra still applies and triggers the action of the market participants.
The buyers are in the accumulation or the mark-up phase and are now looking to book profits. They sell their securities in the open market, witnessing a strong buying interest.
It shifts the sentiments from “bullish” to “mixed,” and several buyers follow the trend. Everyone is now trying to sell their holdings.
Phase IV: Mark-down
A typical market cycle ends with this phase, which witnesses potent “selling pressure” starting in the distribution phase. It downward pressures the stock prices, and eventually, the market crashes.
The stocks are down by double-digit percentages, and a few get locked in lower circuits. The overall sentiment is depressing. Gradually, the stocks bottom out and reach a point where no one is ready to invest.
It marks the beginning of the accumulation phase, and the market cycle repeats itself. Again, a few market participants will see potential in some stock prices and buy at steep discounts to create buying pressure.
When Should You Enter the Stock Market?
There is an opportunity to earn profits only when you buy a stock at a plummeted price. Stock prices are usually at their worst in the last phase of the market cycle, which is the markdown.
Hence, ideally, all Canadians should calculate the intrinsic value of a stock. And prefer investing when:
You should time the market–that is, understand the pattern of your preferred stocks and see through which phase it is moving. Invest when it has bottomed out. It will help you in maximizing your returns.
