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Market Cycles and Sectors

Inside the Markets
Everything on the face of earth moves in cycles. Cycles exist in many facets of life. The markets also move in cycles.  There are four stages that represent the whole life of a stock or a market in any timeframe.  Stage 1 is the ambivalent stage where professionals accumulate. Stage 2 is the bullish period also known as the boom or accumulation part of the cycle when many of the masses start to pile in. Stage 3 is the uncertainty stage where poorly informed market participants begin to doubt themselves and their newly acquired stocks bought late on stage 2 while professionals begin to distribute. Stage 4 is the fear (distribution) stage when heavy selling comes in and the novices are in constant fear and sleepless nights occur.  These cyclical moves repeat themselves over and over again but not necessarily at the same time in all markets and sectors. 

Constant Rotation
Money is constantly being put to work by the professional trader in the form of rotation.  It rarely sits idle (in cash).  Whether it is in stocks commodities bonds or other investment vehicles there is constant rotation going on.  Thus different markets might and will be in different stages of its particular cycle at any given time as they face different levels of supply and demand.  Stage 2 in a stock may occur at the same time as stage 4 in commodities. Thus sectors of stocks directly linked to commodities might experience bullish moves even as the general market (measured by the major indexes) is in a down trend. 

There is Always a Leader
One common misconception that people have is that when the stock market is in a stage 4 all stocks in that market will be in that general stage. This is not necessarily true. Even though a great number (about 75 80%) of stocks will follow the market indexes a smaller percentage will move in different directions.  Diligent traders know that in any market environment there are going to be stocks and whole sectors that buck the trend and some that will lead the market in the same direction of the trend.  Even in the bear market of 20002003 there were dozens of stocks rising.  Sectors like gold defense energy and homebuilders were the leading groups on steady up trends while the NASDAQ was steadily dropping and ultimately lost almost 80% of its value from its 5000 peak in 2000.  Using this year as an example even as the market remained in a sideways stage for the first half of the year the sectors mentioned above were not necessarily in the same stage. 

Unfortunately many investors or traders will generalize the whole market by looking at just the indices and forget to dissect further inside the market to find those groups that have assumed market leadership.  Because of this they will miss out on excellent sector opportunities that the different stages of the markets might present.

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