Hi Money makers,
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In today’s article I’m going to be talking about Market Cycles, when to buy and when to sell, and if you should be panicking right now.
Investor or Trader
The market moves to its own beat, sometimes that beat is loud and clear and other times it’s soft and muffled. It’s a place where great fortunes can be made or lost, where the impatient and the patient converge.
Knowing where we are in these cycles can be beneficial to your finances. Don’t get me wrong, I’m not saying that you should try and time the market, what I’m saying is that it pays to be aware of what is happening in the market, listen to the beats.
If you haven’t read my article explaining what the differences are between a trader and an investor, you can click here to read it now.
It’s important to know what type of person you are when it comes to your investments, because this article could trigger emotions that may cause you to panic.
No one is smart enough to predict what could happen next, certainly not me, and no one is right all of the time. What I talk about in this article shouldn’t be taken at face value, but rather it should be used as a mechanism that provokes thought.
The article has been written to test your existing beliefs, look at it as the other side of the argument. Just remember, these views expressed are my own and shouldn’t be misconstrued as the truth or what will happen.
Market Cycles
The market enables democratized access to trading and exchanging capital for investors of all kinds. We all come for our own various reasons, and because of all these participants, the market dances to the tune of the buyers and the sellers. It creates a melody that can be seen over and over again across different asset classes.
The charts dances to the beat and moves through very distinct stages. These dance moves can be classified into 12 genres.
Hope
Optimism
Belief
Thrill
Euphoria
Complacency
Anxiety
Denial
Panic
Capitulation
Anger
Depression/disbelief
It looks something like this
Many of us have two left feet when it comes to dancing, some of us waltz, some of us freestyle, and others do the cha-cha-cha. There is only a few that can move to all the beats of the stock market.
Then there are those that are hopelessly intoxicated, that move with a false sense of confidence, only to realize the next morning that they were the one doing the worm at 3am in the morning.
What’s my Dance move?
That’s a very important question to be asking yourself before you throw capital into the markets.
For me,
many of you that have been following me on twitter would know by now that I do have a few dance moves, however, I’m no expert, but I certainly know not to be the person left at 3am doing the worm.
I am a big advocate of taking profits and protecting gains while I have the chance. This is because I see the irrationality of the market play out over and over again across different sectors and different stocks.
I am a trader and an investor who moves while the night is young and the music can be heard. I dance the night away, but I do realize that the night must come to an end at some point.
Let’s take a look at a few examples:
Let’s start with everyone’s favorite,
Purple Group Limited (PPE)
Purple Group’s chart is extremely uncanny, it resembles the chart above of the stock market cycles.
We had that massive thrill stage where everyone and their grandmother were pilling in for the fast gains. And as Newton’s third law puts it, “for every action, there is an equal and opposite reaction.” (profit takers)
Could we be entering the anxiety, denial, and panic phase next? I’ll leave that up to you to decide.
If we are, then maximum pain is ahead, and ideally you would want to be buying after the panic, capitulation, depression stage. (red circle)
Remember the mantra, buy low-sell high.
Let’s take a look at another example:
PayPal Holdings (PYPL)
The chart is also very similar to the market cycle chart. However, for this specific stock we may be dancing to a different beat compared to Purple Group.
We may be nearing the stage where everyone is saying get out (panic) which could soon lead to capitulation (people giving up). This then would be the ideal time to be building a position for the long term. (red circle)
There are a dozen more stocks out there that have the same characteristics as these two, because this is how the market dances.
It is why I believe knowing/anticipating where we are in these cycles allows us to either protect our gains or to start building a long-term position in companies we like at more attractive levels.
Remember the mantra, buy low-sell high.
Mentioned Companies
In no way am I saying that these companies are bad, what I’m saying is that sentiment does drive price in the short-term.
It is normal for stocks to over extend in these euphoric periods, and eventually they start to give back some of these gains. It’s because not everyone’s grandmother is a long-term investor anymore, but now a trader.
People have different time horizons and they come to the market for different reasons. When buyers run out and sellers take over, it’s only natural for the beat to change. This is healthy, because no one wants to listen to the same song the whole night.
Closing thoughts
I don’t know many people that go to their own wedding without learning to dance first. Think of investing as you wedding day, you need to prepare yourself before that first dance.
You can’t still be doing the worm at your own wedding, you want to dance like you’ve never danced before with the one you love.
Preparing for and understanding the market takes time and it should be the first thing you do. These cycles come and go and will continue to repeat themselves over and over again. The sooner you start to see them, the sooner your dance moves improve.
Much of what I have learnt has been through trial and error, and it’s why I want to fast track your learning. It’s why I continue to write FOR YOU, because I don’t want to be the only dancer on the dance floor.
Come dance with me, the sooner you start the better your moves get. Start today and read this, click here to get a jump start on your dance moves.
See you next week
Stay safe, everyone :)