Markets are typically split into Bull and Bear markets, each of which has four phases. In essence, the market cycle is the process during which bull markets (green and growing portfolios, optimism, FOMO) mature into corrective bear markets, both of which have their own economic trends. However, certain market conditions may be suitable for a specific business growth regardless of the bull and bear cycles that have been observable since the act of speculation began.
A bull market & its phases.
Discovery or accumulation phase, sparks the start of an emerging positive price (bull) trend supported by higher price highs and higher lows. The bottoming of price and its initial reversal upwards typically goes unnoticed by the vast majority of traders and market participants. Things may seem negative in the market, and there may be doom and gloom headlines and uncertainty circulating from the media, but this is usually where smart money enters the market in anticipation of a “bull run”. The Discovery phase lasts for a quarter of the cycle. Market participant, or “weak hand” shakeouts and “bear traps” are common.
The Momentum or mark-up phase, sees a steady market with growing prices, resulting in an increase in its participation base and awareness. Media sentiment begins to change tone, the fear of missing out on gains, or (FOMO) becomes stronger. The crowd composing the slowly begins to shift from a sophisticated one to one that is less informed. Overall, the market feels healthy, the trend is strong. Participants often feel euphoria and believe this will last forever. This is usually the longest phase of a trending bull market.
A Blow-off or distribution phase brings all that to an end. By this point the market is populated with a lot of new entrants that are feeling euphoric, the less informed, and lower quality audience. Media coverage of how great the market is doing is now everywhere. Participant behavior and emotions can become irrational. The bullish trend grows to a point of no longer being sustainable and errupts, quite quickly, from seller domination and the evacuation of smart money. It is very important to not trick ones own psychology into believing that a bullish trend can continue indefinitely. The blow-off and violent lossess act as a turning point, bringing on a….
Bear market & it’s phases.
Transition or distribution phase, sellers dominate and the first major decline is experienced. Typically there is a short-lived rally that follows the first major sell-off, though this is, in many cases, a bull-trap, using the false sense of security given by the short loved rally as bait. Skepticism in the market increases while buyer optimism fades, this leads to the creation of a major lower high. The transition phase is a difficult emotional time for market participants and the market itself. The speed of the transition phase may vary and can be accelerated by negative news or geopolitical events. For example, the markets were doing relatively well until the Covid-19 pandemic. However, following global lockdowns, the global market wore on its face the impact that negative events and news can have.
Deflation or mark-down phase, at this point the market is reversing quite heavily and transforming into a bear market. Excess valuations and fortunes made with blind optimism and chance are swiftly purged, leading to capitulations or sellers leaving the market at a loss. The effect mounts as more sellers enter the game, shattered. The mark-down phase is accompanied by occasional price bounces of the market, but the downward trajectory leading into despair has already been laid.
But while the market is in a state of despair, traders and investors dragging heavy losses while playing the blame game, seller power actually dries up. This time frame of a deflation phase can vary significantly. However, in the end, a new discovery or accumulation phase will start, paving the road for another bullish market cycle.
