Stock market cycles
At the low point or bottom of the stock market cycles the economy is in poor state and is expected to get worse. This gives rise to a view that interest will have full to counteract on the back of this expectation, interest rate stocks to perform well.
At this stage in the cycle, banks generally take the lead followed by other financial players. As it become obvious that the economy is starting to recover, the bull trend in the stock markets gather momentum. The dominant force is now consumption stocks move coincidentally with the start to be the market leaders.
Financial stocks will not have peaked at this stage. But, because they have been rising for longer relative to other sectors of the market. They do not seem so attractive and their rate of rise slow down. It is an axiom of technical analysis that relative strength will peak before the share price peaks. The are are, therefore, more stocks rising than there were at the start of the bull phase and indicators aimed at gauging the breadth of market activity start to improve significantly.
The mid point
In the middle of a bull run there is an across the broad improvement in market sentiment and, whereas at start of the cycle buying was largely confined to institutions. It now begin to spread out to the general public.
Rising confidence
The next phase of the rally is driven by the " the thundering herd" . Not only are more people buying, but they are move aggressive about how much of their funds will commit to the stock market.
The level of valuation rises and extremely price / earning ratio's are justified on increasingly tenuous grounds. This is the phase of cycle when irrational exuberance and excessive optimism. This stage of the rally can carry on for a long time. Investor who have heard it all before take their profits too early and then spend frustrating months, even years, watching their opportunity costs rack up. The gains made through these impulsive moves can be substantial.
The impulsive phase
During the impulsive phase of the trend, there comes a time when valuation are recognized as having gone too high and the economy begins to overheat. There is tendency to concentrate less on earnings growth and more on asset value. Executive recognize that their company's equity is expensive and there is rush of take over activity.
The commercial and domestic property sector generally do well at this stage in the cycles. It is also at this point that the sector laggards start catch up. These are usually classic cyclical businesses, and as their share prices have not moved up as much as the early leader's they seem cheap by comparison.
Metals and minerals and resources normally trend positively at this time. But their ratings never get to the glamorous levels. That the small growth sectors can attract. For many years these commodities were in secular down trend, so tended to lag a long way behind faster moving sectors. Commodities are now in a secular uptrend so well slowly acquire a more forward looking valuation basis, but their place in the cycle will remain.
After the peak
Finally, the economy will be seem to have peaked and the optimism will be expecting a gradually slow down and the pessimist will be anticipating a full blown recession. The financial sector is the first to decline, but the malaises quickly spread throughout the market. The indicator that monitor the breadth of market activity go into reverse although the market may be still be rising, lulling majority of investor into believing as though the bull trend is still firmly in place.
Trough
Some investor will, however, start increasing the bind weighting in their portfolio. Gradually, more investor will adopt a defensive strategy. The classic defensive sector such as tobacco, pharmaceutical and utilities. They tend to pay good dividends, in some cases, rivalling the return available on bonds.
Psych
At this stage in the cycle, banks generally take the lead followed by other financial players. As it become obvious that the economy is starting to recover, the bull trend in the stock markets gather momentum. The dominant force is now consumption stocks move coincidentally with the start to be the market leaders.
Financial stocks will not have peaked at this stage. But, because they have been rising for longer relative to other sectors of the market. They do not seem so attractive and their rate of rise slow down. It is an axiom of technical analysis that relative strength will peak before the share price peaks. The are are, therefore, more stocks rising than there were at the start of the bull phase and indicators aimed at gauging the breadth of market activity start to improve significantly.
The mid point
In the middle of a bull run there is an across the broad improvement in market sentiment and, whereas at start of the cycle buying was largely confined to institutions. It now begin to spread out to the general public.
Rising confidence
The next phase of the rally is driven by the " the thundering herd" . Not only are more people buying, but they are move aggressive about how much of their funds will commit to the stock market.
The level of valuation rises and extremely price / earning ratio's are justified on increasingly tenuous grounds. This is the phase of cycle when irrational exuberance and excessive optimism. This stage of the rally can carry on for a long time. Investor who have heard it all before take their profits too early and then spend frustrating months, even years, watching their opportunity costs rack up. The gains made through these impulsive moves can be substantial.
The impulsive phase
During the impulsive phase of the trend, there comes a time when valuation are recognized as having gone too high and the economy begins to overheat. There is tendency to concentrate less on earnings growth and more on asset value. Executive recognize that their company's equity is expensive and there is rush of take over activity.
The commercial and domestic property sector generally do well at this stage in the cycles. It is also at this point that the sector laggards start catch up. These are usually classic cyclical businesses, and as their share prices have not moved up as much as the early leader's they seem cheap by comparison.
Metals and minerals and resources normally trend positively at this time. But their ratings never get to the glamorous levels. That the small growth sectors can attract. For many years these commodities were in secular down trend, so tended to lag a long way behind faster moving sectors. Commodities are now in a secular uptrend so well slowly acquire a more forward looking valuation basis, but their place in the cycle will remain.
After the peak
Finally, the economy will be seem to have peaked and the optimism will be expecting a gradually slow down and the pessimist will be anticipating a full blown recession. The financial sector is the first to decline, but the malaises quickly spread throughout the market. The indicator that monitor the breadth of market activity go into reverse although the market may be still be rising, lulling majority of investor into believing as though the bull trend is still firmly in place.
Trough
Some investor will, however, start increasing the bind weighting in their portfolio. Gradually, more investor will adopt a defensive strategy. The classic defensive sector such as tobacco, pharmaceutical and utilities. They tend to pay good dividends, in some cases, rivalling the return available on bonds.
Psych
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