Stock Market Investments Using Market Cycles

Imagine having a cold sugarcane juice in December or a hot ginger tea in May—sounds strange, right? You might be wondering if I've lost my mind. A cold juice in winter and a warm tea in summer? You must be wondering whether I understand the weather or not? Well, I do understand. Just as having the wrong drink at the wrong time can affect my health; similarly, making investments at the wrong time can impact my portfolio negatively. The stock market cycle has four phases, and each phase has its own characteristics. Recognizing the good and bad phases of the market can help us make smarter investment decisions. A deeper understanding of these phases will help you make better investment decisions. So, let’s begin!

1. Accumulation:

This phase occurs when the economy bottoms out and begins to recover. In this phase, early investors spot that the market has seen its worst and is beginning to bounce back. Accumulation means the selling activity has stopped, and buying activity has started. Here, you have the opportunity to buy stocks at low valuations because the market is at a reversal point.

2. Mark-Up phase:

Once buying activity from the Accumulation phase kicks in, it starts gathering momentum. In this phase, market sentiment shifts from neutral to bullish, and most investors jump in. Prices rally significantly in this phase due to heavy buying activity. You could say that, at this stage, the market becomes overpriced.

3. The Distribution phase:

This phase follows the Mark-Up phase. In this phase, the economy is at its peak and starts to correct. Market sentiment shifts from bullish to mixed, as investors begin considering booking profits. This means that investors start selling their stocks, and buying activity begins to slow. At this stage, you can book profits by selling your stocks.

4. The Mark-Down phase:

Once the selling activity in the Distribution phase takes off, this phase begins. In this phase, market sentiment shifts from bullish to bearish, and most investors sell their stocks. Prices drop significantly in this phase, and if investors don’t sell, all their profits could turn negative. This is why a good understanding of the stock market cycle is beneficial in investing. It not only helps you earn profits but also saves you from making the wrong calls.