Tips To Identify Stock Market Phases

Monday, August 30, 2010, 8:38 AM | 7 Comments

In this post, we identify stock market four phases after we identify a typical economic cycle. If you have a job and are gainfully employed [more than 90% have jobs], you should save some money for investing. The equity stock market has proven to be, time and again, one of the best investments and has given a good return on investment (ROI).

If you don’t have a job, then you don’t give one iota of shit what the stock market trends are – up or down unless you had invested before you became one of the statistics in the unemployment line.

In any case, the stock market, like everything else in life, gyrates back and forth. Experts tell us the ups and downs are a little ahead of the economic situation of the day. In other words, when folks feel that a recession is on the recovery side of the pendulum, they start buying into the stock market and eventually it becomes a bull market. The bear market is the reverse when folks start selling, mostly out of fear and panic.

So the equity market goes through phases and it’s the institutional as well as individuals who make things happen when they see a shift in the economy for better or worse. Looking at it another way, the stock market tends to move in advance of actual changes in the economy. The market goes up and down in anticipation of how the economy wind will blow.

Let’s identify a typical economic cycle…

We all know that economic cycles do not move in standardized fashion. That means no two cycles are the same. However, a typical cycle turns out to follow some loosely-defined trends.

In recession, economists tell us, the rate of growth is negative for at least two quarters. The economy emerges from recession when economists look at some acceleration in the rate of growth. If the rate remains strong and gets stronger yet still on a quarterly basis, then full recovery happens and the economy is considered to be in full swing. That’s when the Federal Reserve (Fed) comes in and tries to apply breaks for fear of high inflation among other things.

What the Fed does is raise interest rate to temper high rate of growth and prevent an unwanted rise in inflation rate. That makes the pace of growth slow and eventually turns negative as the economy contracts and enters recession. That leads the Fed to cut interest rates and help move the economy to recover. Over the decades, it has seemed to follow this pendulum and the gyration of its beautiful hips back and forth. [Shakira might be able to shed more light on it.]

Let’s identify equity market phases…

The stock market, like I said before, goes up and down in anticipation of how the economy wind will blow. There are four phases that can be identified:

  1. Prior to the end of recession…

    At the beginning of this phase, investors begin to anticipate an economic recovery. It extends through the initial economic acceleration. This is known as early-cycle phase.

  2. Prior to Fed’s initial rate increase…

    During this phase, the recovery extends into expansion. The market typically performs well during this phase, better known as mid-cycle phase.

  3. Prior to recession…

    Here the stock market anticipates a greater slowdown ahead. This is known as late-cycle phase.

  4. At the start of recession…

    It begins at the start of recession and lasts for the first part of economic contraction.

In a Nutshell
Notice that three of these phases begin prior to an event in the economy ongoing pendulum. Investors anticipate that something, for better or worse, is going to happen and they act accordingly.

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