Sunday, September 18, 2011

4 Stages of Stock Market Cycle - So What?

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?


MK - don't know much, want to learn more said...

ChampDog, U may want to look into a book TrendAdvisor. I was writing off trend analysis until i read and tested the calculations (back tested until 1993 KLCI) & concepts of this book.

In it, it breaks down what U just posted into 6 phases, 3 +ve & 3 -ve. Thus far, i'm using it + value investing as my main investing approaches - yes, investing, not trading :P.
ie. i use Trend to buy "low enough" of pre-filtered & targeted stocks.

ChampDog said...

Thanks for recommendation. I will try to look for it in the bookstore. Well, so far how is the prediction accuracy in term of percentage? :) I"m interested to know. Probably the readers too. :)

Kris said...

I think we are in at the peak for property investment. Everything is at crazy prices, even unbuild units.

ChampDog said...

Interesting, I"m not sure if property follows this cycle and it probably takes longer to go through such cycle?

MK - don't know much, want to learn more said...

Thus far, my calculations and tracking of mid-long Trend based on KLCI data from 3/12/1993 until yesterday, the % of "jumping queue" is less than 0.2%.

"Jumping queue" = instead of sliding right, left or staying in current phase of Trend, it jumps 2 steps
eg. from Accumulation jumping right to Warning OR jumping left to Bearish

It's not that it never happened before, it has but occurrence only less than 0.2% so far.

Thus, if U are a crazy statistician, U may argue that "50% for sure wont jump coz 3 out of 6 phases will only be considered jumping queue given any current phase of Trend"
No probs - double the errors, 0.2% *2 = less than 0.4% heheh. Still a statistically good probability of non-jumping queue to me, thus still high probability to make $.

Lots of details posted below's link - i'm a lazy bugger when it comes to re-typing :P

ChampDog said...

Thanks for the sharing, MK. Will going to read the forum thread. :)

Alvin Lim said...

i also donno what stage are we in. i took profit few months ago, and when it fell, i slowly started to acquire...and it fell MORE....acquired more...and fell MORE. LOL.

no more money already :P somehow my profit from beginning of the year has been wiped out =_=

LCF said...

My experience with the US market (since local market is pretty 'illiquid') is that assuming macroeconomics condition is constant at any given time, you probably could predict price support and resistance 50% of the time. If general market condition changes, tech analysis goes down the drain. Another time when tech analysis is pretty useless is during quarterly earnings, where large price swings are expected when a company earning meets or dont meet analyst estimates. Example, RIMM earnings last week - tech analysis showing everything is going well - price crosses MA and stuff. However, once earnings misses, 19% price drop in one night. No matter how good one's analysis is, the Big Guys (as Phil Town calls them) with bucketloads of cash is the one moving the market - our money is at their mercy. One can have excellent analysis but cannot meet your targeted price or profit, but Teh Hong Piow can without tech analysis know-how.

MK - don't know much, want to learn more said...

Thus knowing the tide coming high or going out low is useful. Trend is not predicting IMHO, but more of what's happening generally

ChampDog said...

@Alvin Lim, yes the hardest part in stock in hard to predict. Did you sell it at the end or you still hold it? It seems to me the economy is getting worst nowadays.

@LCF, yes very true. Technical analysis can't able tell that especially for news that eventually affect the psychology of the investors.

So, perhaps combination of both understanding how news can affect stock price and technical analysis will help?

Hmm... big guys. Anyhow, can we predict how big guys move? lol

@MK, I think is both. Understand what is happening and predicting at the same time. We try our very best to predict, if we predict wrongly, we learn from it and understand why.

Perhaps it really doesn't work if everything is really that unpredictable? Hmm...

kampunginvestor said...

I am anti technical analysis. Enough said! ^^

Pure fundamental investor here... :)

ChampDog said...

Hahaha, I think I know you're. :):)

Kris said...

Don't care whether it is black cat or white long can catch mice, it is a good cat :P

ChampDog said...

Hahaha... nice say!!! :)

kampunginvestor said...

Janji boleh untung is it? haha.. Most importantly is that lo.. But i still stick to my horses which is Fundamental Analysis! wakakaa

ChampDog said...

Who can janji sure untung? No such thing lar! :) Hahaha... Btw, so far how is your fundamental analysis? What is the win %? Do you invest in long term?

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