Market cycles are, per Investopedia.com: “Trends or patterns that may exist in a given market environment, allowing some securities or asset classes to outperform others.”
The term “Bear Market” is synonymous with “up-trending stock cycle”
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Just as the term “Bull Market” is synonymous with “down-trending stock cycle.”
Pro Tip #1
- There isn’t a “set-in-stone” amount of time that a market cycle lasts, up or down.Explained:
Bear markets are generally shorter than Bull markets (thankfully.) However, the “money” in the first two years of a Bull market. After that, you get a lot of back-and-forth price action. Which leads us to pro tip #2:
Pro Tip #2
- Bull and bear cycles don’t usually end easily.Explained: It takes a few months of back-and-forth, volatile price action to wear out the onboard investors. After this bucking bull ride, major investors have thrown in the towel and are not willing to continue pushing the current market direction. Crowd psychology has a lot to do with it, but we’re not psychologists; just investors.
Pro Tip #3
- Bear markets usually bottom out while economic indicators are still looking gloomy, and business is still in a downtrend. Conversely, Bull markets usually top when economic news is cheery and price projections are through the roof.Explained: Why? Glad you asked. Because in pro tip #4...
Pro Tip #4
- The stock market is a leading economic indicator, not a lagging or coincident one.Explained: Therefore, the current market cycle can turn around, despite the economic news being passed around. It’s a leading indicator because the stock market is composed of the thousands upon thousands of brilliant minds of investors. Making the market extremely perceptive to news, events and economic conditions. The market not only reacts to news as it breaks, but predicts and discounts future economic events.
Pro Tip #5
-Capital goods industries are generally late movers in cycles.Explained: If you see them come to life after many moons of an uptrend, watch out. What are capital goods industries? Here are a few:
- Construction (services and raw materials)
- Aerospace and Defense
- Construction (machinery)
- Agriculture (machines)
The keyword here is “raw materials.” Things that go into making other things. That’s what capital goods are.
| As a quick example of this, in the good ‘ol “2000-tech-bubble” crash, the industries supplying electronic capital goods (equipment, supplies, hardware, etc.) were the last movers of the cycle. |
Pro Tip #6
- If the “laggards” are leading the market, watch out!Explained: If you’re, say, more than two years into a bull market cycle and see dull stocks coming to life, it’s a bad sign. If you see that, the large institutional investors are placing their bets on the lower-performing “defensive” or “safer” stocks. These lower-performing stocks don’t have the strength or support to continue driving up-trends upwards.
Pro Tip #7
- Extraordinary Popular Delusions and The Madness of Crowds by Charles MacKay.Explained: Excellent book. It really gives you a perspective on how cycles are controlled by “group think” and collective thought. We’ll toss it on the recommended list if you’re interested in finding out more about why they start and end as they do.
So there you have it! Figure out which cycle you’re in now, (1st year Bear market, late-stage Bull market? Etc.) use it to your advantage, and your portfolio will thank you.
We’re the Stock Marketeers, and we approve of this message.
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