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Cycles in the Stock Market

Advocates of the stock market cycles state the argument that like the seasons of nature, the stock market also moves in cycles. They state that just like knowing when to plant seed to get the most bountiful harvest, planting your investment at the right time will also get you the most from your investment. According to the argument, there are basically four different cycles in the stock market.

The first cycle is the accumulation cycle. This cycle occurs after the market has bottomed out. This is when corporate insiders and the early adopters jump in. The overall sentiment is still bearish at this point. Many outlook articles still point to the fact that the market is in a bear market. In this cycle there are still those trying to dump their stocks but at the same time there are opportunists picking up these stocks. In this cycle prices have flattened. The problem with identifying this cycle is that it is hard to actually predict when the bottom has occurred. Stocks have a tendency to pause and then continue down.

The second cycle is known as the mark-up cycle. In this cycle the market has stabilized. More investors are starting to enter the market. Those who write market outlooks start to tout that the worst may be over. Based on their statements, even more investors decide it is time to enter the market. Near the maturity of this cycle, the latecomers finally jump in. They choose to buy shares of stock when the market is actually near the top. Due to their choice, the market makes a jump and many investors are euphoric about the expected outcome.

In the distribution cycle, sellers begin to enter the market. The market sentiment becomes somewhat mixed. Stock market prices generally trade within a set range during this cycle. This cycle can be a short or a long term cycle. No one really knows how long it will last since it has varied over time. The investors who have not moved out of the market already will sometimes choose to settle for a break even or a small loss as they determine the nature of things.

The last cycle, the mark-down cycle, is the most painful for those who are still holding on to their investments. The downturn has caused them to be in a terrific loss situation and they finally decide to take their lumps and exit the market. Unfortunately for them, there are those who are watching the cycles and are willing to buy their losers as they expect the market to turn.

The cycle theory is a great theory but making it work for you becomes the tricky part. The stock market is not like nature. There are many different side factors that affect the stock market. Wars, disasters, national events and other macro outcomes can have an unexpected effect on the market. They can throw a real twist on thing.

Isaac Newton in 1768 stated "I can calculate the motion of heavenly bodies but not the movements of the stock market." Many computer models have been developed to track the cycles of the market and attempt to predict when the turn is going to happen. If they actually worked to perfection then there would be more rich people in the world.

If you do decide to time the market, you need to remember that those who actually can time the market are not in the newspapers or on television stating that they are acting. The only way you will actually know is after the fact when it is too late. I am not saying that the market does not move in cycles, I am merely saying that it will take a lot of study and effort to determine with accuracy when to enter and exit the market. If you miss out on the few good days in the market, you will miss out on large profits.

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