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What Is the Best Market Cycle for Canadians?

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It’s volatile. You cannot be sure of what is going to happen next. All you can do is predict it, 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 due to an increase in the prices of stocks.

Whereas, in times of recession, you will always find ways to cover your losses. And on some days, protect your principal from getting wiped out!

But why does this happen? Can’t we study the market and time our trades accordingly?

Well, the answer to this question is what prompted us to write this blog. Through it, we educate you about the different market cycles following which the stock prices move. Let us understand together.

Why Study Market Cycles?

Based on trend analysis and years of study, the stock market can be divided into four market cycles. The stock prices react differently in these phases.

If you know about them, you can better make investment decisions and time your trades with great precision. It reduces your chances of predictions going wrong and helps you adopt a good trading strategy.

The Four Market Cycles

Phase I: Accumulation

We always need a starting point to begin any study. Let us start from a point when the stock prices are bottomed out and are available at a steep discount.

The intrinsic values of the stocks are attractive, and there is a chance to earn higher profits. It attracts three different types of market participants, which are:

Market Participants of Accumulation PhaseDescription
Corporate InsidersThe stock market reacts to news, and no one is in a better place than the senior officers of a company who know all the secrets.This class generally has certain material information which is not available in the public domainIt helps them in making investment decisions
Value InvestorsThey are usually industry veterans who know the art of timing and precisely understand the potential of every stockThis class prefers to buy those stocks that are available almost at two-thirds of their intrinsic valueThey usually rely on:Performing the fundamental analysisUsage of technical indicatorsInterpretations of economic developments
Experienced TradersThey are not as smart as value investors and are usually individuals trying to buy stocks at steep discounts.They do analyze trends using charts, such as candlestick charts, and make their buying decisions.

All the above-mentioned market participants usually feel that the “worst is behind them”, and from now the market will move north. Thus, they start buying securities.

Phase II: Mark-up

Stock prices are based on the market forces of demand and supply. The participants of the accumulation phase trigger accelerated buying. At the same time, there is strong selling as well.

In simple words, for every buyer willing to buy stocks, there is a seller on the other side, ready to square off the open position. Due to 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 is willing to buy the stocks, as they feel it 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 are usually locked in the “upper circuit”. Mostly the peak is reached, and now there are several pending buying orders, but a majority of sellers are very minimal.

You can make money only when – You buy cheap and sell dearer. This age-old mantra still applies and triggers the next action of the market participants.

The buyers, whether in the accumulation phase or the mark-up phase, are now looking to book profits. They sell their securities in the open market, which is currently witnessing a strong buying interest.

It shifts the sentiments from “bullish” to “mixed”, and several buyers follow the trend. Almost everyone is now trying to sell their holdings.

Phase IV: Mark-down

A typical market cycle ends with this phase, which witnesses a strong “selling pressure” initiated in the distribution phase. It puts downward pressure on the stock prices, and eventually – the market crashes.

The stocks are down by double-digit percentages, and a few are locked in lower circuits. The overall sentiment is depressing. Gradually, the stocks bottom out and reach a point when no one is ready to invest.

This event marks the beginning of the accumulation phase, and the market cycle repeats itself. Again, a few market participants will see potential in some stocks. They will start buying at steep discounts to create buying pressure.

When Should You Enter?

There is an opportunity to earn profits only when you buy a stock at a plummeted price. The stocks are usually at their worst in the last phase of the market cycle, that is, the mark-down.

Hence, ideally, all Canadians should calculate the intrinsic value of the 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.

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