Stock Market Cycle

By Author: Anthony Green
Total Articles: 36
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The low point at the low point or bottom of the stock market cycle, the economy is in a poor state and is expected to get worse. This gives rise to a view that interest rates will have to fall to counteract the economic downturn and, on the back of this expectation, interest-rate stocks start to perform well.

At this stage in the cycle, banks generally take the lead, followed by other financial players. As it becomes obvious that the economy is starting to recover, the bull trend in the stock market gathers momentum. The dominant force is now consumption. Stocks that move coincidently with the economy start to be the market leaders.

High-street retailers, for example, feature regularly in stock market reports. Financial stocks will not have peaked at this stage but, because they have been rising for longer relative to other sectors of the market, they do not seem so attractive and their rate of rise slows down.

It is an axiom of technical analysis that relative strength will peak before the share price peaks. There are, therefore, more stocks rising than there were at the start of the bull phase and indicators ...
... aimed at gauging the breadth of market activity

Start to improve significantly. For example, the ratio of stocks showing again against those showing a decline starts to pick up significantly and the number of stocks trading above their rising moving average line also increases.

Finally, the economy will be seen to have peaked and the optimists will be expecting a gradual slowdown and the pessimists will be anticipating a full-blown recession. The financial sector is the first to decline, but the malaise quickly pleads throughout the market.

The indicators that monitor the breadth of market activity go into reverse although the market may still be rising, lulling the majority of investors into believing as though the bull trend is still firmly in place