The Best Binary Options Broker 2020!
Perfect Choice For Beginners!
Free Demo Account!
Free Trading Education!
Get Your Sing-Up Bonus Now!
Only For Experienced Traders!
Sector investing using the business cycle
It may be possible to enhance returns over an intermediate time horizon.
- Fidelity Viewpoints
- – 05/31/2020
- The business cycle can be a determinant of sector performance over the intermediate term.
- The phases of the economy provide a framework for sector allocation.
- For example, the consumer discretionary and industrials sectors tend to outperform in the early cycle.
Over the intermediate term, asset performance is often driven largely by cyclical factors tied to the state of the economy, such as corporate earnings, interest rates, and inflation. The business cycle, which encompasses the cyclical fluctuations in an economy over many months or a few years, can therefore be a critical determinant of equity market returns and the performance of equity sectors. This article demonstrates Fidelity’s business cycle approach to sector investing, and how it potentially can enhance returns over an intermediate time horizon.
Asset allocation framework
Fidelity’s Asset Allocation Research Team (AART) conducts economic, fundamental, and quantitative research to produce asset allocation recommendations for Fidelity’s portfolio managers and investment teams. Our framework begins with the premise that long-term historical averages provide a reasonable baseline for portfolio allocations. However, over shorter time horizons—30 years or less—asset price fluctuations are driven by a confluence of various short-, intermediate-, and long-term factors that may cause performance to deviate significantly from historical averages. For this reason, incorporating a framework that analyzes underlying factors and trends among the following 3 temporal segments can be an effective asset allocation approach: tactical (1–12 months), business cycle (1–10 years), and secular (10–30 years).
Asset performance is driven by a confluence of various short-, intermediate-, and long-term factors
Understanding business cycle phases
Every business cycle is different in its own way, but certain patterns have tended to repeat themselves over time. Fluctuations in the business cycle are essentially distinct changes in the rate of growth in economic activity, particularly changes in 3 key cycles—the corporate profit cycle, the credit cycle, and the inventory cycle—as well as changes in the employment backdrop and monetary policy. While unforeseen macroeconomic events or shocks can sometimes disrupt a trend, changes in these key indicators historically have provided a relatively reliable guide to recognizing the different phases of an economic cycle. Our quantitatively backed, probabilistic approach helps in identifying, with a reasonable degree of confidence, the state of the business cycle at different points in time. Specifically, there are 4 distinct phases of a typical business cycle (see chart).
- Early-cycle phase: Generally, a sharp recovery from recession, marked by an inflection from negative to positive growth in economic activity (e.g., gross domestic product, industrial production), then an accelerating growth rate. Credit conditions stop tightening amid easy monetary policy, creating a healthy environment for rapid margin expansion and profit growth. Business inventories are low, while sales growth improves significantly.
- Mid-cycle phase: Typically the longest phase of the business cycle. The mid-cycle is characterized by a positive but more moderate rate of growth than that experienced during the early-cycle phase. Economic activity gathers momentum, credit growth becomes strong, and profitability is healthy against an accommodative—though increasingly neutral—monetary policy backdrop. Inventories and sales grow, reaching equilibrium relative to each other.
- Late-cycle phase: Often coincides with peak economic activity, implying that the rate of growth remains positive but slows. A typical late-cycle phase may be characteristic as an overheating stage for the economy when capacity becomes constrained, which leads to rising inflationary pressures. While rates of inflation are not always high, rising inflationary pressures and a tight labor market tend to crimp profit margins and lead to tighter monetary policy.
- Recession phase: Features a contraction in economic activity. Corporate profits decline and credit is scarce for all economic actors. Monetary policy becomes more accommodative and inventories gradually fall despite low sales levels, setting up for the next recovery.
The performance of economically sensitive assets such as stocks tends to be the strongest during the early phase of the business cycle, when growth is rising at an accelerating rate, then moderates through the other phases until returns generally decline during the recession. In contrast, more defensive assets such as Treasury bonds typically experience the opposite pattern, enjoying their highest returns relative to stocks during a recession, and their worst performance during the early cycle.
The business cycle has 4 distinct phases. The US is firmly in the late cycle as of 2020.
Equity sector performance patterns
Historical analysis of the cycles since 1962 shows that the relative performance of equity market sectors has tended to rotate as the overall economy shifts from one stage of the business cycle to the next, with different sectors assuming performance leadership in different economic phases. 1 Due to structural shifts in the economy, technological innovation, varying regulatory backdrops, and other factors, no one sector has behaved uniformly for every business cycle. While it is important to note outperformance, it is also helpful to recognize sectors with consistent underperformance. Knowing which sectors of the market to reduce exposure to can be just as useful as knowing which tend to have the most robust outperformance.
Historically, the early-cycle phase has featured the highest absolute performance. Since 1962, the broader stock market has produced an average total return of more than 20% per year during this phase, and its average length has been roughly one year. On a relative basis, sectors that typically benefit most from a backdrop of low interest rates and the first signs of economic improvement have tended to lead the broader market’s advance. Specifically, interest-rate-sensitive sectors—such as consumer discretionary, financials, and real estate—historically have outperformed the broader market (see chart). These sectors have performed well, due in part to industries within the sectors that typically benefit from increased borrowing, including diversified financials and consumer-linked industries such as autos and household durables in consumer discretionary.
Elsewhere, economically sensitive sectors—such as industrials and information technology—have been boosted by shifts from recession to recovery. For example, the industrials sector has some industries—such as transportation and capital goods—in which stock prices often have rallied in anticipation of economic recovery. Information technology and materials stocks typically have been aided by renewed expectations for consumer and corporate spending strength.
Laggards of the early-cycle phase include communication services and utilities, which generally are more defensive in nature due to fairly persistent demand across all stages of the cycle. Energy sector stocks also have lagged during the early phase, as inflationary pressures—and thus energy prices—tend to be lower during a recovery from recession. From a performance consistency perspective, consumer discretionary stocks have beaten the broader market in every early-cycle phase since 1962, while industrials also have exhibited impressive cycle hit rates. The financials and information technology sectors both have had healthy average and median relative performance, though their low hit rates are due in part to the diversity of their underlying industries. The communication services sector has historically underperformed in the early-cycle phase, but its evolving mix of industries provides less confidence in the persistence of this pattern moving forward.
Sectors that have performed well in the early cycle are interest-rate sensitive and economically sensitive sectors
As the economy moves beyond its initial stage of recovery and as growth rates moderate, the leadership of interest-rate-sensitive sectors typically has tapered. At this point in the cycle, economically sensitive sectors still have performed well, but a shift has often taken place toward some industries that see a peak in demand for their products or services only after the expansion has become more firmly entrenched. Average annual stock market performance has tended to be fairly strong (roughly 15%), though not to the same degree as in the early-cycle phase. In addition, the average mid-cycle phase of the business cycle tends to be significantly longer than any other stage (roughly 3.5 years), and this phase is also when most stock market corrections have taken place. For this reason, sector leadership has rotated frequently, resulting in the smallest sector-performance differentiation of any business cycle phase. No sector has outperformed or underperformed the broader market more than 75% of the time, and the magnitude of the relative performance has been modest compared with the other 3 phases.
Information technology has been the best performer of all the sectors during this phase, having certain industries—such as semiconductors and hardware—that typically pick up momentum once companies gain more confidence in the stability of an economic recovery and are more willing to make capital expenditures (see chart). We also expect the new communication services sector to outperform during the mid-cycle phase, largely due to the strength of the media industry at this point in the cycle.
From an underperformance perspective, the materials and utilities sectors have lagged by the greatest magnitude. Due to the lack of clear sector leadership, the mid-cycle phase is a market environment in which investors may want to consider keeping their sector bets to a minimum while employing other approaches to generate additional active opportunities.
Sector leadership has rotated frequently in the mid-cycle phase, resulting in the smallest sector performance differentiation of any business cycle phase
The late-cycle phase has had an average duration of roughly a year and a half, and overall stock market performance has averaged 6% on an annualized basis. As the economic recovery matures, the energy and materials sectors, whose fate is closely tied to the prices of raw materials, previously have done well as inflationary pressures build and the late-cycle economic expansion helps maintain solid demand (see next chart below).
Elsewhere, as investors begin to glimpse signs of an economic slowdown, defensive-oriented sectors—those in which revenues are tied more to basic needs and are less economically sensitive, particularly health care, but also consumer staples and utilities—generally have performed well. Looking across all 3 analytical measures, the energy sector has seen the most convincing patterns of outperformance in the late cycle, with high average and median relative performance along with a high cycle hit rate.
Information technology and consumer discretionary stocks have lagged most often, tending to suffer the most during this phase, as inflationary pressures crimp profit margins and investors move away from the most economically sensitive areas.
As the economic recovery matures, the materials and energy sectors have typically performed well, as have defensive-oriented sectors
The recession phase has historically been the shortest, lasting slightly less than a year on average—and the broader market has performed poorly during this phase (−15% average annual return). As economic growth stalls and contracts, sectors that are more economically sensitive fall out of favor, and those that are defensively oriented move to the front of the performance line. These less economically sensitive sectors, including consumer staples, utilities, and health care, are dominated by industries that produce items such as toothpaste, electricity, and prescription drugs, which consumers are less likely to cut back on during a recession (see next chart below). These sectors’ profits are likely to be more stable than those in other sectors in a contracting economy. The consumer staples sector has a perfect track record of outperforming the broader market throughout the entire recession phase, while utilities and health care are frequent outperformers. High-dividend yields provided by utility and telecom companies also have helped these sectors hold up relatively well during recessions. On the downside, economically and interest-rate-sensitive sectors— such as industrials, information technology, and real estate—typically have underperformed the broader market during this phase.
Defensive-oriented sectors have tended to outperform during the recession phase
The merits of the business cycle approach
For those interested in a more active approach to managing their equity exposure, the business cycle approach offers considerable potential for taking advantage of relative sector-performance opportunities. As the probability of a shift in phase increases—for instance, from mid-cycle to late-cycle—such a strategy allows investors to adjust their exposure to sectors that have prominent performance patterns in the next phase of the cycle (see next chart below). Our views on these phase shifts are presented in recurring monthly updates on the business cycle. 2 By its very nature, the business cycle focuses on an intermediate time horizon (i.e., cycle phases that rotate on average every few months to every few years). This may make it more practical for some investors to execute than shorter-term approaches.
Looking at sectors throughout the business cycle
Note: The typical business cycle shown above is a hypothetical illustration. There is not always a chronological progression in this order, and in past cycles the economy has skipped a phase or retraced an earlier one.
Source for sector performance during business cycle: Fidelity Investments (AART). Unshaded (white) portions above suggest no clear pattern of over- or underperformance vs. broader market. Double +/– signs indicate that the sector is showing a consistent signal across all three metrics: full-phase average performance, median monthly difference, and cycle hit rate. A single +/– indicates a mixed or less consistent signal. Returns data from 1962 to 2020. Annualized returns are represented by the performance of the largest 3,000 US stocks measured by market capitalization, and sectors are defined by the Global Industry Classification Standard (GICS ® ). Past performance is no guarantee of future results. See below for important information.
Additional considerations for capturing alpha in sectors
Incorporating analysis and execution at the industry level may provide investors with greater opportunities to generate relative outperformance (“alpha”) in a business cycle approach. Industries within each sector can have significantly different fundamental performance drivers that may be masked by sector-level results, leading to significantly different industry-level price performance (see next chart below).
In addition, there are other strategies that can be incorporated to complement the business cycle approach and potentially capture additional alpha in equity sectors. Consider the following:
- Macro-fundamental analysis: Macro-fundamental industry research can identify—independently of typical business cycle patterns—variables specific to the dynamics of each industry that may affect performance. For example, a significant change in the cost of key raw material inputs—such as oil prices for airlines—can drive a deviation in an industry’s performance.
- Bottom-up analysis: Company-specific analysis— through individual security selection—can identify unique traits in individual companies that may outweigh the impact of the typical business cycle pattern on that company’s future performance.
- Global business cycle analysis: The US stock market has global exposure, which may warrant allocating toward or away from domestically focused sectors, depending on the phase of the US business cycle relative to the rest of the world. When the US business cycle is more favorable than the global cycle, sectors with more global exposure are likely to face greater headwinds to revenue growth, while more domestically linked sectors could fare relatively well.
- Inflation overlay: The inflation backdrop can heavily influence some sectors’ profitability. Short-term inflation trends tend to ebb and flow with the movement of the business cycle, but longer-term inflation trends sometimes move independently of the business cycle.
- Secular overlay: Long-term secular trends that are expected to unfold over multiple business cycles can warrant a permanently higher or lower allocation to a given sector than a pure business cycle approach would suggest.
Each industry within a sector has specific drivers that may affect performance
Every business cycle is different, and so are the relative performance patterns among equity sectors. However, using a disciplined business cycle approach, it is possible to identify key phases in the economy and to use those signals in an effort to achieve active returns from sector allocation.
Analyzing relative sector performance
Certain metrics help evaluate the historical performance of each sector relative to the broader equity market (all data are annualized for comparison purposes):
- Full-phase average performance: Calculates the (geometric) average performance of a sector in a particular phase of the business cycle, and subtracts the performance of the broader equity market. This method better captures the impact of compounding and performance that is experienced across full market cycles (i.e., longer holding periods). However, performance outliers carry greater weight and can skew results.
- Median monthly difference: Calculates the difference in the monthly performance of a sector compared with the broader equity market, and then takes the midpoint of those observations. This measure is indifferent to when a return period begins during a phase, which makes it a good measure for investors who may miss significant portions of each business cycle phase. This method mutes the extreme performance differences of outliers, and also underemphasizes the impact of compounding returns.
- Cycle hit rate: Calculates the frequency of a sector’s outperforming the broader equity market over each business cycle phase since 1962. This measure represents the consistency of sector performance relative to the broader market over different cycles, removing the possibility that outsized gains during one period in history influence overall averages. This method suffers somewhat from small sample sizes, with only 7 full cycles during the period, but persistent outperformance or underperformance still can be observed.
We updated our Business Cycle Sector Framework as a result of the September 2020 changes to the Global Industry Classification Standard (GICS) structure. This framework was last refreshed in 2020, following the elevation of real estate as the 11th GICS sector.
As of September 2020, the newly formed communication services sector combined the legacy telecommunication services sector with entertainment software, traditional media, and internet media companies. As a result, this new sector is more cyclical than its more-defensive predecessor, telecom, and we expect it to perform well in the mid cycle and underperform during recessions. Our assessment of communication services is more qualitative than that of the other sectors, given its evolving mix of industries.
Other sectors were also impacted by the shift in the GICS structure. Consumer discretionary lost some large internet media companies and gained online marketplaces. The departure of internet companies made the outlook for consumer discretionary less favorable in the mid cycle. Information technology was also affected by losing some internet and entertainment software companies, but the overall business cycle playbook for information technology companies did not change as a result.
Next steps to consider
Fidelity Go ® is an easy, affordable way to get professional money management.
MarketWatch Site Logo A link that brings you back to the homepage.
Dispatches From a Pandemic: Live Q&A event with MarketWatch’s Quentin Fottrell
(Editor’s note: In this week’s MarketwatchRevolution Investing newsletter, Cody Willard outlined where we are in the cycles of the economy, the stock market and the Federal Reserve, how they all fit together and what it means forhis portfolio. Here’s free look at this week’s newsletter, which you can order here.)
Let’s step back and do some broader analysis here of the cycles and the stock markets and the economic setup for the short and longer terms.
The Fed and the near term
The currency wars around the world have resulted in a race to devalue every developed economy’s currency. Negative interest rates are a reality in countries that account for more than one-quarter of the world’s GDP. Because the dollar remains the world’s reserve currency and will continue to be so for the foreseeable future, the U.S. Federal Reserve has much more leeway to cut rates, create new forms of quantitative easing (QE), and perhaps even move to negative interest rates here in the U.S.
All this means that I expect the Fed to move from its current tightening phase and expected two rate hikes this year to another easing cycle for the next year or two. Whether this is bullish for the stock market or bearish is a matter of debate.
There’s an old saying on Wall Street that you “shouldn’t fight the Fed,” which means you should expect higher stock prices while the Fed is easing. But for the last 20 years or so, the exact opposite has been true — you would have wanted to be in stocks when the Fed was in a tightening phase in the late 1990s, while you would have wanted to be out of the markets or even short stocks when the Fed was easing again from 2000 to 2002.
Likewise, you would have wanted to be in stocks when the Fed was in a tightening phase from 2003 to 2007, while you would have wanted to be out of the markets or even short stocks when the Fed was easing again from 2008 and 2009. The Fed has been cutting QE since 2020 or so which was essentially a move into another tightening phase and, once again, stocks boomed.
When the cycles come in
On the other hand, the timing of these stock market vs Fed cycles is far from perfect, and overlaps and countermoves in stock markets can last for weeks or months and go further than you ever thought possible, both to the upside and downside.
Back in October 2007 when I closed my hedge fund and took a job as a Fox Business news anchor, I wrote a series of columns called “This won’t end well.” I spent the first few months on the new job warning people about the coming real-estate crash and how the repercussions of it would be enormous.
I just don’t see that kind of a setup right now. Don’t get me wrong, I certainly expect there will be more than one stock-market crash and/or economic depressions in my lifetime. And there’s always the chance that the markets crash again near term, for a reason that wasn’t on my radar.
For now, though, I would guess that there’s at least one more leg up in the Bubble-Blowing Bull Market. I would expect a couple of serious selloffs over the course of this spring and into middle summer, but I wouldn’t want to try to game them other than to own some great stocks but have plenty of cash ready to put to work buying great Revolutionary companies with a focus on technology stocks in coming months.
After having been aggressively long stocks and a few long-dated call options with few or no short positions in 2020 and 2020, as I was wildly bullish about the economic setup, the Fed cycle, corporate earnings growth and most of all, the App Revolution/App Bubble, I’ve cut the number of stocks I own in half and have trimmed down the number of shares I own in my existing longs. I’ve added a few short positions, including Valeant Pharma US:VRX six months ago before it became the poster child for profiteering in the health-care industry, Pandora Radio US:P , and a few others.
Playing the odds
We don’t have to be all in or all out at any given time. Jim Cramer once gave me a book by Andrew Byer called, believe it or not, “Picking Winners: A Horseplayer’s Guide.” Cramer told me that there were a lot of lessons about how to manage risk-vs.-reward scenarios in your portfolio that you can learn from Byer’s work on horse-race handicapping.
In essence, it’s that you want to bet big when the odds are terrifically in your favor, bet smaller when the odds are just somewhat in your favor, and to walk away entirely when the odds are against you. Right now, the odds are just okay in the stock market as I don’t expect a big crash near-term but I also don’t expect stocks to bubble to new heights in the near-term either. So we bet smaller for now, but we remain in the markets overall.
I don’t plan on being as aggressively long stocks as I was in 2020 and 2020 until we’ve actually had another stock market crash. On the flipside, when I think the timing for the next major stock-market crash/financial crisis/Black Swan event to hit looks closer, I plan on having more shorts, even more cash and fewer longs on the sheets than I do right now.
The longer-term view
Speaking of stock market crashes, financial crises and Black Swan events, let’s move to the long-term outlook for stocks and the economy. The fact is we have huge imbalances, central planning and out-of-control redistribution of wealth in the U.S. and global societies. And when I say redistribution of wealth, I mean the use of taxes and other governmental policies that are redistributing wealth upward. Imbalances, central planning and redistribution of wealth to a select few — these are not the things that long-term prosperity is built upon, and we all know it.
The reason that wealth disparity in this country has gotten to third-world levels is because every central-bank policy, almost every law passed by the Republican/Democrat Regime on a national level and many on a state and local level, every bailout — even the Obama/RomneyCare health-care system and wars themselves — are all done in the name of creating more profits for giant banks and giant corporations. Zero-percent interest rates, QE, bank bailouts . these things hurt everybody reading this because you and your children are the ones who have to pay for them. I’ll bet that the businesses that you all work for paid 30% or more in taxes last year, while Goldman GS, +4.01% , Apple AAPL, -0.11% and Wal-Mart WMT, -0.20% paid less than one-third that effective tax rate. And that’s another example of how wealth disparities can grow from unlevel playing fields created by big government.
It’s the small town, hard-working, local communities that are truly being drained dry by these policies that take your wealth and funnel it through the government to giant banks and corporations in big cities. And every time another trillion of dollars of debt is added to the taxpayer’s balance sheet, it’s another trillion dollars of prosperity that the current generations are stealing from our children.
This is all very real, and it’s tragic, and it will cause even more hardships, death and wealth disparity unless all of us as citizens of this country and this community stop the cycle.
What will be the likely catalyst for this house of card political and economic reality we live in to come crashing down? Higher rates, I would expect.
Not some measly 0.25% bump or two in overnight rates at the Fed. Rather, if and when you finally see interest rates across the board, from mortgage rates to corporate rates to long-term Treasury rates, start to rise sustainably, that will probably the time to really get cautious, as the hundreds of trillions of dollars of sovereign and corporate and bank debt around the world won’t be able to be rolled over any more.
In the meantime, enjoy the good times and slowly but surely prepare for the bad.
For more information on how to sign up for the weekly Marketwatch Revolution Investing Newsletter, click here.
Market Cycles | Phases, Stages, and Common Characteristics
Market Cycles: What You Need to Know
A market cycle is the process in which bull markets mature from beginning to end and then reverse into a bear market where excesses from the bull market are corrected. These cycles have been unfolding in comparable fashion since market speculation began. While no two market cycles have ever looked identical or had the exact same underlying drivers, they generally exhibited similar characteristics during each portion of the cycle primarily due to human nature and market psychology.
A majority run their course and fall in the ‘normal’ bull & bear market cycle category while some have morphed into full-blown bubbles or manias which resulted in crashes . The difference between the two is the magnitude at which the underlying asset price climbs and the pitch at which investor sentiment rises. In any event, the following will help provide a guide for those who want to learn about the differing phases of a market cycle to help better navigate them.
A market cycle has five main phases: Discovery, Momentum, Blow-off, Transition, and Deflation. A full market cycle may last only a few years or a couple of decades, depending on whether it is a cyclical (short-term) or secular (long-term) trend. Typically, shorter, cyclical trends also develop within the context of the longer, secular trends.
This phase marks the beginning of an emerging bull market trend and goes unnoticed by the majority of market participants . It’s during this period when the last bear market officially ends and the new bull market begins, however; this doesn’t become apparent until later in the cycle.
- *Duration – Accounts for roughly 25% of the cycle.
- Accumulation – Smart money investors sniff out an emerging trend and accumulate in anticipation of a new bull market.
- Trend emergence – Marked by a gradual bullish price sequence of higher highs and higher lows.
- Shake-out – The initial rally becomes exhausted and the ensuing decline creates enough doubt that it shakes out the weaker hands.
In this phase the trend draws in an increasingly larger market participation base as awareness spreads. Growing participation and excitement builds, accelerating the trend and creating strong momentum.
- *Duration – Typically the longest segment of the bull cycle, roughly 3 5 % of the cycle .
- Momentum builds – During this phase the underlying bull market becomes apparent to a broader group of market participants. Sentiment feeds a healthy trend.
- Early on in this phase investors are still largely made up of only sophisticated investors, but as the trend matures an increasingly less-informed crowd joins the trend.
- First sentiment extreme – Attitude towards the market is healthy and able to sustain a strong trend, and sentiment doesn’t become moderately extreme until the end of the phase.
- Bear trap – Concerns regarding overvaluation and an ending cycle feed a correction. However, the dip ends with a new round of buyers and provides a base for the next leg of the cycle.
This is the most violent phase of the bull market as it speeds ahead with maximum participation with the least informed (every day investors) joining in. M arket participants’ behavior becomes increasingly irrational, and in the case of bubbles/manias it becomes highly irrational. Eventually the trend becomes unsustainable and typically in an abrupt fashion.
- *Duration – Roughly the final 10% of the bullish portion of the cycle .
- Renewed optimism – Market participants rebuild confidence following the last correction leading to new highs in the cycle. This reinforces bullish market psychology and the notion that the trend is sustainable, indefinitely.
- FOMO – ‘Fear of Missing Out’ sets in as the trend accelerates. During this period the least-informed market participants (i.e. – John Q. Public) join in and daily media coverage becomes widespread.
- Euphoria – At this point, many market participants believe the old rules of market cycles no longer apply and that indeed – “it’s different this time” – prices will rise indefinitely.
- The most violent segment of the blow-off phase as investor rationality goes out the window – “to infinity and beyond”. Price can even double or more in extreme cases in a very short period of time.
- ‘Smart Money’ exits – Many smart money managers exit throughout this cycle, but even as such, many sophisticated hedge fund managers are still found guilty of chasing performance.
This is where a major turning point takes shape in market psychology, as the cycle shifts from bullish to neutral to bearish. There is still optimism that the market will continue to trader higher, but enough skepticism at this juncture to prevent it from doing such. In short, it’s a push-pull process between buyers and sellers.
- *Duration – Lasts a small percentage of the total cycle, roughly 5% of the process
- Shot across the bow – This is the first major decline following the blow-off phase. It serves as a warning shot, marked by a fast and furious sell-off. This breaks the ‘animal spirits’ of the bull market as collectively market participants begin to become less certain about the future.
- Bull-trap – The rally following the first decline off the high stabilizes market sentiment for the time-being, giving investors a false sense of confidence that the sell-off was nothing more than a sharp, but healthy correction.
- The Lower-high – Buying pressure fades as skepticism leads to selling. The market begins to behave differently than it had after prior corrections by stalling and creating a major lower-high.
- Major turning point in market psychology. There is remaining optimism that the market will continue higher, but enough skepticism that this juncture to prevent it from doing such.
- Breakdown – Confirmation of a top starts here when the prior low from the ‘shot across the bow’ is broken. This morphs into the most damaging portion of the cycle as a large reversal of fortune begins to pick up momentum…
This is really nothing more than the market moving in to reverse , or a bear market , and typically unfolds quickly , purging excesses built up during t he bull market.
- *Duration – Roughly 25% of total cycle, but can vary greatly as the end of the cycle can last years
- The purging of excesses built up during the bullish market phases.
- Fear and capitulation – In this stage, crowd psychology clearly changes as market participants recognize that the bull market is over. As losses continue to mount sellers show up in earnest, driving prices down at a rapid pace. This often leads to panic-selling and capitulation.
- Bottom fishing – After significant damage investors seeking value look for a bottom but rallies quickly fail. The battle between value buyers and residual sellers (booking losses) keeps the market bouncing along to lower and lower prices.
- Despair, end of bear – Disgust reigns supreme as losses reach a maximum. Residual selling dries up. Market participants play the blame game here, looking for the culprit. This period can be over relatively short or last several years before leading to a new ‘Discovery’ phase.
*Durations can vary greatly, only rough estimates.
To Conclude, further reading…
Market cycles have been going on forever and will continue to play out in a similar manner long into the future. To see how these cycles played out during some of the most extreme times in market history, check out “A Brief History of Major Financial Bubbles, Crises, and Flash-crashes” .
Having a sound understanding of the various phases which make up a market cycle can provide a blueprint for navigating future cycles. To further help you, we have beginner and advanced tutorials related to market cycles (Elliot Wave Principle) and quarterly trading forecasts; these can be found on the DailyFX Trading Guides page .
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Prominent Stock Market Cycles
Four-Dimensional Stock Market Structures and Cycles
“READERS CHOICE AWARD” – Stock Trading Systems
Technical Analysis of Stocks and Commodities Magazine
|Four-Dimensional Stock Market Structures and Cycles is the first set of 2 books and contains the first ten lessons in the 4 book course.|
Although the stock market is used for examples, the techniques are universal and can be applied to any market.
This award-winning home-study course teaches market analysts how to make accurate financial market models predicting price-time action years into the future. These techniques combine geometry with cycle analysis to pinpoint turns in both price and time. There are workbook-like questions/answers producing price and time projections with accuracy better than one percent.
One example of the results obtained by applying the techniques taught in this course is shown below where a five-year model of the stock market is shown that was created in February 1984 using these techniques. The Dow Jones Industrial Average is shown below the graph for comparison to what actually happened after this model was made.
This Home-Study Course is the Only Source for this Information
|The material in FOUR-DIMENSIONAL STOCK MARKET STRUCTURES AND CYCLES is an entirely new way of analyzing financial markets. YOU HAVE NEVER SEEN THIS MATERIAL BEFORE, because it has never before been released to the public by any author. Even if you are the head of technical analysis at the leading brokerage firm in the country or the world’s greatest trader, this material will be new to you. For example, listed below are just some of the topics uniquely solved in this course.|
Explains Why the Periodicity of Cycle Bottoms and Tops Varies
Contemporary cycle analysts have no clue why cycle bottoms deviate from an ideal rhythm, and why tops wander even more than bottoms.
Their problem is that they are using the limited perspective of a two-dimensional price time chart. Without knowledge of the correct geometry involved, the solution to this problem remains hidden from view. One of the many topics covered in Lesson V explains why the periodicity of cycles vary and teaches the analyst how to anticipate these changes. Many examples in the DJIA are provided.
Resolves the Mystery of the Disappearing 52-Month Cycle
FOUR-DIMENSIONAL STOCK MARKET STRUCTURES AND CYCLES fully explains this phenomenon. After studying this course, the analyst will understand the nature and cause of the 52-month cycle, including why it appeared in the first place. More importantly, the analyst will know what to expect from this and other cycles in the future.
“Cycles repeat along the face of the geometric structure that is being completed at that time. When the face of this structure is complete, the structure rotates to expose its next face. The cycles on this new face have a phase shift from the cycles on the previous face.” . page 124 from the course
If the analyst is to accurately project financial market cycles he must be able to answer the critical questions of when and where the face of the geometric structure will complete. There is no guess work in determining in advance when a geometric growth pattern will complete. Using the techniques outlined in this course, the exact dates and prices when the growth pattern will complete can be pinpointed 100 YEARS OR MORE in the future. The only limitation is the resolution of the available historical data and the homogeneity of the index used.
Geometry Combined With Cycles Pinpoints Future Market Turns
When market geometry is combined with our unique form of cycle analysis, the result is unmatched in its ability to accurately project future turning points in both PRICE AND TIME. Turning points can then be projected years into the future, as well as the daily or hourly swings.
The results produced by applying the techniques in this course produce errors of less than one percent even when calculated over time periods extending for decades. This is not a “theory only” course. Emphasis is on direct practical application of projecting market turning points, IN BOTH PRICE AND TIME.
FIVE-YEAR STOCK MARKET MODEL
For example, look at the accompanying figure. The top line is the model that was created in 1984 to project the stock market for the next several years. The bottom line is what actually happened. EVERY TURNING POINT WAS PREDICTED BY THIS MODEL! i.e., the bottom in August, 1982; the top in January, 1984; the bottom in July, 1984; the bottom in September, 1985; the sideways churning market during March-September, 1986; the major top in August, 1987; and the “crash of October 1987”. Lesson IX walks you through the process that was used to create this model step-by-step. FOUR-DIMENSIONAL STOCK MARKET STRUCTURES AND CYCLES not only teaches the analyst how to make his own models for any time period desired, past or future, but also how to increase the resolution well beyond that graphed in the accompanying figure.
Two-Dimensional Price-Time Charts Do Not Accurately Represent Price-Time Action
More importantly, he will learn how to build his own future models. One of the best traders in history was W. D. Gann. He wrote in his Master Course For Stocks: “The square and the triangle form within the circle but there is an inner circle and an inner square, as well as an outer square and an outer circle which prove the fourth dimension in working out market movements.”
FOUR-DIMENSIONAL STOCK MARKET STRUCTURES AND CYCLES is the only work ever produced that identifies, precisely measures, and projects into the future the four-dimensional structures of which W. D. Gann spoke.
A PhD Or Computer Is Not Needed To Understand This Course And Implement The Techniques
Although the title of this course may seem a little imposing, it is not as difficult a concept as you might think. Price and time changes unfold in growth patterns that can be measured with simple geometry, that is the first part of the course.
The “Four-Dimensional” part comes into play when you add the time element. The first three dimensions are length, height, and width of the geometric structure and the fourth dimension is time as the price-time chart unfolds. NO COMPUTER OR SPECIAL SOFTWARE IS NEEDED.
The Scientific Basis Of Financial Market Geometry
Market price changes occur within the confines of predetermined points of force. The relative locations of these points form clearly defined geometric structures.
Scientific applications of this phenomenon are found throughout nature. Geologists apply the “crystal lattice” structure to classify minerals by looking at the geometric arrangement of their planes of cleavage. Similarly, chemists can identify an element by looking at the geometry of its constituent atoms.
Financial markets also exhibit a characteristic geometric lattice as they unfold in price-time. When the geometric pattern of a financial market is understood projections can be made, not only in the dimension of price, but also in the dimension of TIME. This course provides example after example, covering a period of over 200 years, proving that the geometric approach to market timing can pinpoint exactly WHEN AND WHERE a market will reverse direction, well within the resolution of the available data. For example, the top of the market in August, 1987 was one of the easiest turning points ever to identify. This home-study course shows how completion of this growth process was timed years in advance within TWO POINTS and TWO TRADING DAYS! This type of accuracy is not a fluke. Every movement the market makes occurs within the confines of geometric structures which can be understood after mastery of the material in this home-study course.
Geometry Is The Market Analysis Of The 21st Century
If you are still using the obsolete tools of Elliott Wave, conventional cycle analysis, or one of the other methods that has been beaten to death over the years by thousands of traders and analysts, then you are aware that all these techniques produce unreliable and inconsistent results.
Even the so-called “experts” on these methods acknowledge the great limitations of their approach. These methods are obsolete, subjective, and dangerous to risk money on.Best Binary Options Brokers 2020:
The Best Binary Options Broker 2020!
Perfect Choice For Beginners!
Free Demo Account!
Free Trading Education!
Get Your Sing-Up Bonus Now!
Only For Experienced Traders!