THE MARKET CYCLE AND ITS CHORUSES

The Washout: “All Is Lost”

At a major bottom current business news is usually terrible and many authorities feel that

things are likely get even worse. The brokerage business is likely to be in dumps with many

bankruptcies, Eventually a point is reached where everybody who can be scared into selling

has sold. Usually, the final battle occurs in a few days of extremely high volume- a selling

climax. At this point the ordinary investor, who has gone over the waterfall is groggy,

bruised and sick, is ear ringing. He does not want to hear about the stocks, never again.

The Early Surge: “ Its too Early to Buy…”

We are at the beginning of the dynamic phase of the bull market. The optimum buying “

window” will last for only a few months, but it is prudent to hold off most of your buying until

the market has clearly turned and is full and by on the new course. You can usually recognize

when the upward trend has been solidly established. The professional investors does not mind

paying 20% more for a stock that has been cut by two thirds to be quite certain that it is not

going to go down a lot more.

The government shocked by the decline as always beset by the clamor to do something,

pumps liquidity into the economy which of course does not take effect instantly. Stock market

pundits declared that this time the stimulus is not working.

The months go by and the price rises. The misery of the recent past is quickly forgotten, like a

throne extract from your foot. A few mutual funds will have been started during the bottom

area and article in the financial press being point out that ‘X fund’ has grown by 75% in six

months. One starts hearing story of the people who made a lot of money.

The Surge Continues: “Prices Seem High…. It’s too late too Buy.”

More months pass and the market can now be seen to have established a rising channel for

itself. The ‘Index’ oscillates from top of the channel to the bottom, but continues to in the

same broad upward path. There will be few significant reactions during this phase of the

new bull market.

The rising prices of the principal stock attract more buying from the professional and from

institutions that have been waiting on the sidelines; this additional buying puts prices still

higher. The higher prices in turn give confidence to more buyers, who enter the market

putting prices higher still. The whole system continues to feed upon itself, to rise and build

like prairie twister.

The general public during this phase moves from feeling that it’s too early to buy to feeling

that it’s to late to buy.

The Second Stage of the Rocket: “Prices Are High, But Maybe It’s Okay to Buy…”

Times passes. Then public, which has been apathetically watching from the sidelines starts to

become interested. There are a number of downward legs or tests, against the bottom of the

market rising channel each time the test is reversed at a higher level than before. The longer

the channel remains intact, the more it is consider invulnerable but the more it is considered

invulnerable the closer it is to a bust. Most times there is eventually pronounced and

unmistakable rise in the volume fervor and the tempo of the dance continue to mount. The

music play louder and louder more and more spectators join in.

Not a Cloud in the Sky: “Buy!”

More months go by and the public hooked. Business news is excellent. The standard forecast

of the economic is optimistic. Some particular industry surfaces as the center of attention and

the focus self-confirming myth as the brokers and professional bid up these “ talisman”

stocks to irrational heights.

The Blow off: “ Stocks can only go Up”

Hot manager become famous. Hot manager become famous. Young, Glib, impatient of the

conventional wisdom, they collect huge sums from trustful and greedy investor hoping for

miracles. The volume of hot manager trading may become a significant part of the whole

market. They chase a new theme as a pack. A broker can sell any stock by letting it be known

that he is in touch with a few big operators who are getting behind it.

Most new issues, even companies without a history or even established management rise to

an immediate premium. At cocktail parties, people talk excitedly about the latest prodigy.

News of your neighbour buying a new car with profit of stock is heard. Now people jump into

the market with both feet, buying all the second and third graded companies, which are

called “the star in the making”. This is what called a buying panic- the reverse of selling

panic.

Coasting: “The markets High, But this time is different….”

As the months wear on stocks hesitate; their upward pace slows with only a few leader

making new highs. The market analyst detects this situation as loss of “breath”. For instant,

the ratio of advance declines usually starts falling, even though the leaders are still rising. A

few enthusiastic still claims that this time thing is different. They rationalize that there is an

absolute shortage of stock because of an insatiable institutional or foreign appetite for them,

which will support prices at permanently higher level.

The Top: “Hold”

At last the government, concerned about economic “overheating” and stock market

speculation starts leaning against the wind. The central bank raises the reserves

requirement; the discount rate goes upto notch; margin requirements may be tightened. Here

again the government gets what it wants, and in time this process always wrestles down a

runway bull market.

The operators suspicious of stock price levels step up the sale of their holding in the market.

A series of vicious reactions or chops begins probably for the first time since the cycle

started. Sometime later there is a second vicious chop, which usually bottoms at a higher

level, than the previous one. The recovery again carries to a high, those who sold out at the

bottom of either reaction feels foolish. Those who jumped at that level are jubilant. Then the

southward journey starts and each reaction making a lower bottom.

The secondary stock those not in the index has been sluggish for months. This is the

beginning of the end.

Over the Humps: “Its too Soon to S ell”

The public remains heavily in the market but the professional investors edging out. It is like

an ogre’s dinner party at which the last guest to leave or eaten themselves. When the chairs

begin to be pushed back and napkin placed on the table, the wise diner prepares to dash for

the exit as soon as there is any excuse to do it. This crush at the door is why the market goes

down much faster than it goes up. The lower quality stocks starts declining significantly.

The Slide: “Prices are Cheap, But it’s Too Late to Sell……”

A few months passes and a number of scripts, although not yet the leader have fallen

appreciably from their height perhaps 30 percent. The market has been going down for some

time. Business news is now felt to be not too good we hear doubts about economic outlook;

perhaps there will be a recession next year?

The market like a tired horse that no longer feels the whip, drops on a bad news but fails to

respond to the good news.

“Its Okay to Sell”

After a while we may see a severe decline with perhaps25 percent mark off the prices. There

is often deceptive recovery, which one might call the “ trap rally” the usual sequence is that

the lowest quality stocks collapse first, while the top quality issues struggle forward; then the

general market start giving ground. Finally the institutional growth stocks let go and

everything starts slipping faster and faster. The primary issues are quoted well below their

offers.

The Cascade: “Sell”

Now the river sweeps over the brink, carrying everything with it. Business news is a bad. The

hot fund managers have to meet redemptions and as such they have to sell.

The Selling Climax: “The Market’s Going Way Down…”

The torrent crashes down the falls. In the frightful plunge some stocks give up in a day their

gains of a year and drop 30 to 40 percent in a week or two. It is a so sudden and so awful

that for a while many investors finally thrown in the sponge and sell out.

But if you have kept some reserves intact and have the knowledge of recognize value when

it’s being dumped by panicky and have the guts to act then at these moment you can make the

buys of a lifetime.