The Four Stages of a Market Cycle: Where are we?

Markets do not have a fixed structure. Price movements are fluid, unpredictable at times and well defined at other times. Yet, within this unpredictable framework, there is a structure that applies to stock markets. This structure was defined by Wyckoff, although many analysts and authors have defined similar stock market structures.

Wyckoff said that prices move through four stages:

Stage 1: Accumulation: when smart money begins to buy at low prices.

Stage 2: Markup: when retail and other investors begin to buy and prices rise to catch up with improving fundamentals.

Stage 3: Distribution: when prices rise more than justified, and, smart money begins to liquidate or sell positions.

Stage 4: Markdown: when stock prices begin to fall rapidly, with panic setting in.

After stage 4, share prices begin to sell at bargain prices. So smart money comes in to buy slowly, starting the process of accumulation, and, the four stage cycle begins once again.

Where is the Indian Stock Market in the four stage cycle?

Looking at the short term cycle, the market is probably in stage 4 where panic selling is coming in. Stage 4 should eventually lead to stage 1: accumulation.

There is no formula to determine the end of stage 4 and the beginning of stage 1. It is more of a slow process rather than a onetime event.

It is our opinion that the mark down phase is slowly coming to an end, with smart money probably going to start buying slowly. Like most good things in life, investors require patience to reap the benefits of low share prices.

Please understand that this four stage cycle applies to blue chips and good quality stocks. Speculative stocks will disappear from the horizon when the next cycle begins. For this reason, we continue to suggest buying only in Blue chips.