I just read around and I found this 4 stages of stock market cycle by Stan Weinstein. It basically means no matter how the stock will look like, it can never go out of these 4 stages. These 4 stages are very powerful because it can apply to all time frames whether it is 1 day, 1 month, 1 quarter, 1 year or 5 years. Powerful or not? Also, it will be repeated over and over again. For example it goes back to stage 1 from stage 4. Now let’s look at what are these 4 stages about:
Stage 1: Consolidation & Accumulation
This is also called base building stage or a depression stage. Basically, It is the most bottom point of the stock market cycle where majority of investors have lost confidence at this stage and are reluctant to invest their money in stock market. Smart investors at his point are waiting to use their reserved cash to start investing when it starts moving to Stage 2.
Stage 2: Uptrend & Mark-up
This is also called the expansion stage or mark-up stage. At this stage, the stock has been stable for a while and starts to climb up. Novice or inexperienced investors are still hesitant to get in because they are still haven’t recovered from the stage 1. Smart investor will start investing at the early of stage 2 as shown in the graph.
Stage 3: Distribution & Peak
This is the stage where you can hear all the good news and the economy seems like it has never been better. At this stage, most novice or inexperienced investors jump into stock market because they think the prices will go even higher. This is exactly what happened to me when I owned an US stock with USD100 price in year 2000. I was still expecting it will go even higher! Smart investor at this stage are getting ready to exit.
Stage 4: Downtrend & Mark-down
This is a declining stage but nobody believes the downtrend especially at the early stage. They believe the downtrend is just a correction and it will go up pretty soon. On the other hand, smart investors have mostly taken profits and sold all their shares causing the share prices to drop. Novice investors will either take losses or turn to long-term hold if they reluctant to sell.
Note: These 4 stages of stock cycles are always correct because it is based law of nature. What is the law of nature? The law of nature is: what goes up must come down, what goes down must come up. So no matter what, the 4 stages are always correct!
So what? You may ask because no one will know exactly which stage they are in and this makes the whole thing pointless. Basically you still do not know when is your best time for buying and selling. The purpose of this article is to let you know there are these 4" stages. What you need to do next is how to identify or at least to make your best guess to identify where you are in this 4 stages based on whatever data that you have.
P/S: A technique called “Technical Analysis" is one of the ways you can predict the future based on the past historical data. However, I have not used or researched on technical analysis yet. So for those who have used technical analysis before for your stock investment, what do you think of this technique? Can technical analysis predict the future or at least help you to make a right investment decision?