4 Stages of a Market Cycle


The 4 stages of a market cycle are Accumulation, Markup, Distribution, and Downtrend. Market cycles can last a few days to many years, depending on the specific market.

Each of these four stages has specific defining characteristics. Serious investors should have knowledge of each stage in order to make informed decisions. Great investors develop a special skill to know when to buy, sell, or hold.

Market Cycle Stages

It’s not possible to predict markets with certainty, I recommend running as fast as possible from anyone who tries to convince you otherwise. However, a few of the most intelligent investors in the world have devoted their entire careers to studying market cycle stages. I would encourage you to listen carefully to their wisdom.

It’s important to have an understanding of the characteristics that make up each stage of a market cycle. If you’re searching for an identifiable beginning or a clear ending to a market cycle, good luck. Most cycles don’t announce their arrival or departure. Wise investors know the market cycle signals so they can tilt the odds in their favor.

1. Accumulation Phase

The accumulation phase occurs when the market has bottomed out. Investor sentiment has been low for an extended period of time, along with asset prices. Investors have sold, but no clear trend has emerged. The accumulation phase is also known as a time of consolidation.

At this time, savvy investors will purchase assets. Specific characteristics of the accumulation stage include:

  • Prices that have flattened out
  • No clear trend is identified
  • A bearish market
  • Negative news reports regarding most assets
  • Investor sentiment is negative
  • Central banks lower interest rates to encourage investment

For the average Joe, assets might appear to be a poor investment. However, experienced investors may recognize the opportunity presented.

The accumulation phase can last for a few weeks to a few months. Price ranges will not have a lot of variances. Price action is dull and “boring.” Meanwhile, assets form a base.

Wise investors begin to notice it might be a good time to begin buying, but cautiously. This drawn-out time period is the early stage of a new market cycle.

2. Markup Phase

At this stage in the market cycle, the media begins to recognize that sentiment for investment has changed. News reports are more optimistic and the general public begins to hop on the buying bandwagon. 

Other attributes of the markup cycle include:

  • The market for investment begins to move upward after a period of stability
  • Investors and stock technicians begin to make investments
  • Market volumes increase substantially
  • The “average Joe” decides to jump into investing
  • Investment pours into assets, often using leverage
  • Market is highly bullish

The markup phase is where the greatest gains are realized. It’s a boom period where everyone seems to be making money. Individual investors feel like they can’t make any mistakes. “Investing is easy,” they say.

Another interesting characteristic of the markup phase sees disdain for underperforming assets. Value investors are harassed, cautious investors are mocked, pessimists are laughed out of the room.

The markup phase is the best time for a trader to make money. Experienced traders will purchase stock in a dip and wait for it to quickly bounce back. Swing traders, short-term traders, day-traders, and all other types of market gurus profess to have mastered the market.

3. Distribution Phase

The distribution period occurs when there is a mix of active sellers and buyers. Prices begin to level off. Other characteristics of this phase include:

  • Sentiment for a stock or the market, in general, is mixed
  • Prices in the market stay in a specific range for weeks or months
  • There is an equal mix of buying and selling
  • Investors may sell for breakeven prices or a small loss

The end of this phase marks the completion of a market bull run. It may occur over several months or the phase can be significantly accelerated by negative industry news or a negative economic event.

During the distribution phase, there is a lot of volatility. Investors begin to sell their shares as they recognize the next stage of stock market cycles is near.

4. Downtrend Phase

During the downtrend phase, the market begins to turn bearish. Attributes of this phase include:

  • Prices of stocks fall dramatically
  • Investors who failed to sell during the distribution phase see large losses
  • Market conditions worsen, fear of an economic downturn escalate
  • Negative news and bearish market sentiment spread
  • Wise investors may begin to purchase in anticipation of the next bull run
  • Signals inform investors that a bottom is imminent

The downtrend phase marks the end of a complete market cycle. Knowledgeable investors have already sold, waiting for the next accumulation and markup phases and begin. The less-fortunate watch in horror as assets plunge in value. Even quality companies with strong business models see stock prices decline.

This is a great opportunity for long-term investors if they buy at the right time. This phase typically marks the lowest stocks will fall during a single market cycle and can be the best time to make new investments.

How Long Does a Full Market Cycle Last?

A day trader may see several market cycles within a single eight-hour period. Distinct phases of market cycles can also be observed by analysts over several years or even decades. It’s easy to examine the cycles of the past. But nearly impossible to identify how long a full market cycle will continue into the future.

Market cycles can be observed in individual public stocks, industry segments, stock exchanges, alternative assets, and entire economies.

The Wyckoff Method

We shouldn’t go any further without discussing one of the market cycle pioneers, Richard Wyckoff. In the early 20th century, Richard Wyckoff studied, “the rules of the game,” general guidelines for identifying times to enter or exit investments.

Along with other investing legends of his time such as Jesse Livermore, and JP Morgan, Wyckoff observed patterns based on investor psychology. Knowing how the crowd reacted to asset price movements could prepare you for making wise decisions in the future.

stages of market cycle wyckoff
Richard Wyckoff – Image Credit Wikimedia Commons

The Mark Up and Mark Down phases in asset price movements came from Wyckoff’s Trading Cycle. While Wyckoff specialized in public equities back in the 1920s, his methods translate to any asset market with a large number of participants actively buying and selling.


READ more about fear and greed in markets –

Beyond the Fear and Greed Index


Examples of Market Cycles

To help you understand the nature of market cycles, let’s take a look at some of the most well-known examples of different phrases.

The Great Depression

Perhaps the most well-known and prolonged market cycle occurred in the late 1920s through the end of the 1930s. 

The Roaring 20s, as they were termed, saw a huge swing in the stock market. Investors bought stocks heavily and the market saw a huge upswing in prices. Millionaires were made overnight, and there was a lot of euphoria in the economy. Gains from past performance led to more buying, as money steadily poured into most assets.

The 1920s marked a period of heavy accumulation and markup phases. The economy was roaring, sales of luxury goods increased, and investors were euphoric.

The Big Market Cycle

However, cracks in the economic cycle began to appear that triggered a huge Wall Street selloff on a date known as Black Thursday in October 1929. The market made some gains over the next two days, but another sell-off on Black Tuesday wiped them out. A significant portion of the entire stock market was gone.

Between the peak of the market in September and the final bottom out in July of 1932, the market lost 89% of its value.

The market began to pick up in the late 1930s when the U.S. entered World War II but did not recover all of its losses until November 1954. 

The Global Financial Crisis

The Great Global Financial Crisis of 2008 – 2009 was another example of market cycles playing out through each phase. Signs of euphoria were showing in 2007, and within a year, large institutional investors were in big trouble.

After a few years of the accumulation phase from 2004 and 2005, markets took off. The capital market was clearly in the Mark-up phase of the cycle as many assets hit new highs in 2007. By the end of the year, the distribution phase was churning along. By 2008, the downtrend phase hit every stock index, market participants realized the same thing all at once.

Big market moves hit almost all asset classes and financial assets sending economic growth into a tailspin. It wouldn’t be until early 2009 when the lows of the stock market were reached.

Real Estate Market Cycle Stages

A real estate cycle occurs across four different phases that are very similar to a stock market cycle. These cycles are affected by interest rates, vacancy rates, new construction, and home prices instead of the rise and fall of stock prices. 

Recovery

During this period, there is little demand for space, no new construction underway, and low or flat rental rates. This is an opportunity for a real estate investor to find a bargain. Although the phase may be difficult to identify to the average investor, it’s the very beginning of a new bull market. 

Expansion

The expansion period is marked by growing demand for space, decent job growth, and rising rents. Construction increases, sometimes at a high speed. 

Hyper Supply

There is an excess of supply from over-building. Rent may continue to increase, but at a rate less than experienced during the expansion period. Lower prices begin to slowly emerge.

Recession

Supply exceeds demand, and rent growth is either negative or below the historical trend. Owners may reduce rents or offer incentives to attract potential tenants.

Bear Market Cycles

The average bear market in stocks is less than one year. Technically, a bear market begins when assets fall at least 20% from their most recent high.

There have been 14 bear markets on Wall Street since 1945. Before that, 12 bear markets occurred in just the previous 17 years.

A bear market in stocks doesn’t always lead to an economic recession.

Bull Market Cycles

The average bull market in stocks has historically lasted around five years. The stock market is tied closely to the economy, so when the production output of goods and services changes, it creates the business cycle.

A new bull market begins once assets move 20% above their recent low. Historically, bull markets move slower than bear markets. They can go on for much longer than anyone expects, but can also end quickly.


READ more about Wall Street legends and hedge fund industry titans –

17 Jesse Livermore Quotes to Remember

Inside Renaissance Technologies Medallion Fund

Bridgewater Associates Average Return and the Man Behind the Money

First Television Interview by Warren Buffett


How Do Corporate Profits Affect Market Cycles?

Strong corporate profits are a primary factor underlying financial markets. Strong quarters of consistent profit growth in a particular sector indicate an industry that’s prime for investment. When economic conditions are favorable, sales, revenue, and profits increase.

There’s a good chance companies are able to distribute some of those profits to shareholders in the form of dividends. Stocks have a better chance of appreciating in value when corporate profits are increasing.

Takeaways – Market Cycle Stages

Prudent investors, financial advisors, managers of mutual funds, and hedge funds spend their entire careers trying to read market cycles. Understanding market cycles and identifying them when they occur is much harder than it sounds. In hindsight, markets are easy. Looking forward, nobody has the answer. It’s up to each investor to make prudent investment decisions.

Developing investment strategies and planning asset allocation is one of the most important jobs in investing. There’s no silver bullet, but the continued study of market cycles can lead to significant wealth over the long term if investments are purchased at the right time.


READ more about markets, investing, and how to make the right moves –

9 Favorite Investing Quotes of All Time

The Dao of Mark Spitznagel

Michael Burry Does It Again