Economic Cycles Exist! It’s Time To Profit
To make money in the market in regular basis the only things you need is; A price change of your investment moving on your way.
If the price doesn’t move, you can’t profit from it or worst, you will incur a loss if the price move in opposite direction. This tells us that “Only Price Pays”.
For successful investors and even more for traders, the price is the most important factors which you should focus.
If you think you are going to become successful in trading/investing by reading financial news, watching Bloomberg channel or listen to people with the right advice, “Think Again!”
Most successful traders don’t even pay attention to the news; they are disconnected from the world, but they constantly watch only one thing; PRICE.
All the fluff about the news is a way of reasoning why something happened (effect). But knowing the “why” isn’t going to make you rich. An example?
How much money do you think a reporters in Bloomberg is making per year?
A couple of millions you might think after all these “experts” know about markets and investing, but the truth is they are making around US$100,000 per year.
Don’t get me wrong, understanding the rationale behind a move can be helpful, but “Only PRICE Pays”.Only price pays in trading Click To Tweet
Remember that news follows the trend. In times of bull markets the news will be optimistic, vice-versa in time bear market the news will be pessimistic.
I listen news and use them only when reporters speak for weeks about horrible economic news, thinks like:
“It’s the end of our financial system”
“The recession is here”
“China is melting down”
These are clear indications that is time to jump in because the market has corrected. When other fears, I’m greedy.
Use Indicators To Determine Price Movements
Indicators are important to help you to make the right decisions forward your investments.
For me, the two most important indicators are:
~ 1. Day Moving Average; this indicator smooth out the “noise” from random price fluctuations. I like to keep an eye on the 20, 50, 150, and 200-day simple moving averages
I use these averages as an aid in choosing where to enter or exit a certain position. This indicator is useless without using the volume indicator.
~ 2 . Volume Indicator; Volume is simply the number of shares or contracts that trade over a given period, usually a day. The volume tells me how much interest there is about that particular investment. If buyers, the higher goes the price, instead if the seller, the price goes down.
There are hundreds of indicators out there. Fortunately, you’ll need only a few, and if you use the proper combination of indicators you can forecast short-term price movement before THE price moves.
To timely accurately time market bottom and tops while predicting price movements, the key to selecting the proper indicators and tools. Three type of analysis is essentials;
~ market sentiment
Before we dig into the analysis, you need to make up your mind in which market or sector you want to specialize.
Single Market Analysis
There are a wide range of investment vehicles out there; mutual funds, stocks, bonds, ETFs.
So, what do you trade?
A trader must start somewhere to be successful, and you need to master one class first extremely well. Once you are pulling out consistently money from it, you can move to the next one and grow your strategy.
Each investment has its personality regarding volatility, trade volume, pay dividends… so make sense each investment vehicle to be traded differently.
At the moment, I’m investing in commodity and energy ETFs.
Did I just say investing instead of trading? Correct, because I’m investing for the long term.
The reason is commodity and energy sectors have formed a cycle’s bottom. These markets are dropping for the last three years.
What are the chances the prices drop more? Almost none, it makes economic sense.
Otherwise, you will build your new house with free material and do 1000 Kms with US$10 of petrol.
I’ve selected the best ETFs for 2016 with a long term view to save you some time and energy on your investing strategy. Don’t take my opinion for granted instead, do some research on your own.
I choose the ETFs as a vehicle because they represent the best companies in these two sectors (diversification) with the lowest fees (costs) and high liquidity (I can get out anytime).
Cycle Is The Leading Stock Market Indicator
Cycles are one of the best indicators for me because they have improved my bottom line. I can timing entry points, profit taking and exits which helps with my success in investing.
The interesting part is that you will not see anywhere this major indicator in technical charts or financial newspaper. It’s a pity.
Cycles are everywhere. It’s the essence of life. Just look at yourself, your life is a cycle; 0-10 Childhood; 10-20 Adolescent; 20-35 Early Adulthood; 35-50 Midlife; 50+ Mature Adulthood.
Market stocks have moved in cycles from the beginning of time, and this indicates that is going to continue.
However, people are still neglecting the fact of the existence of market cycles and their usefulness in predicting the markets.
No wonders when I hear people say you can’t predict the markets. It’s like say to a sailor that you can’t predict which way the wind will blow. If that is the case, Christopher Columbus wouldn’t have discovered the Americas.
This indicator shows me where the money is going, and where the money goes, there is to profit.
Identifying Cycles Bottoms and Tops
We need to understand that markets move influence stock prices up and down. After all, the market is the sum of all stock action.
What makes the market move is the action of investors buying or selling influenced by surrounding news.
The interesting things here is the markets move in rhythmic motion forming peaks and troughs. These invisible forces move the financial markets with clear patterns, the effect of regular cyclic forces in play.
The good news is that cycles can be identified and measured over time, in fact, what goes up must come done in the financial world as in the real world. They continue to re-appear over time with a high degree of predictability.
In investing you can gain greatly if you can predict movements of markets. Just imagine if you could predict the top and bottom of 2008 crisis, you would have benefited greatly.
There are series of cycles joining causing explosive moves in the market, and you want to ride them. For any markets, these opportunities rise between 1 to 3 times per year.
But who benefit the most from Cycles?
Everyone, short traders, long traders, value investors and savers.
Some cyclic influences are derived from calendar based events such new presidency, FED decisions while other aren’t clear, but they exist.
What Creates Stock Market Cycles?
Now that we have learned the importance of cycles (if it isn’t clear yet, in short; understanding of cycles is essential if you want to maximize investment or trading returns). This is part of technical analyses and help investors to define the four phases of a cycle, so you know where your investment stand, helping you to avoid being caught off guard.
The primary causes of market cycles are:
~ 1. Economic data; This is a major factor that makes the market move and changes direction. Money move in or go out from the market. In recent years, the FED decision to stop QE and increase interest rate had a major impact on emerging markets. Money moved out, the dollar strengthens against most currencies, and emerging market underperformed the S&P 500.
~ 2. Seasonal factors; A clear example are stock related to tourism such airlines and hotels. High season, stock prices move highers because of improving profits.
~ 3. Greed and fear; These two sentiments move markets quickly. Any financial crisis is trigger by fear while investor’s greed develops the period of a boom.
These are only the three most common “whys” of stock market cycles, and there are many mores. However, the “whys” aren’t so critical for a successful trader/investors, instead, recognizing the change of cycles and knowing the size of each developing wave that tells you the times to start earning big profits and adequately protecting yourself against reversals.
It’s important to understand the phases of a cycle, which are four and apply them to your investment strategy.
Phases Of A Full Market Cycle
I remind you the importance to recognize each of the four stages of a cycle; they go up, peak, go down and then the bottom. Being ahead of the curve, offer you better opportunities to profit and stop losses. Any market has a cycle without exception.
~ 1. Fall-down Phase
In this phase, the market correct. The investors left to hold the bag are the inexperienced one, reluctant to let it go as the value of their portfolio go down.
Once reach the bottom, the market settle and start to trade side way. Many of whom bought during the distribution or early mark-down phase, give up or capitulate.
The value investors move in to buy, and the cycle starts again in an upper trend.
~ 2. Accumulation Phase
This phase is my favorite and the safest to jump in any investment because the market is moving into a straight up trend with minimal downside. This phase occurs after the market has bottomed, sophisticated investors, insider and expert traders take advantage of the attractive valuations of the investment vehicle.
In this phase, the market is still bearish, but the price settles in a bottom. Most people still feel sick from the lost they occur during the mark-down phase and newspaper loudly express how weak the economic conditions are.
In my experience, I know to recognize this period because I feel like FIRE SALE day.
~ 3. Mark-up Phase
In this phase, the market moves higher with increase volume. Early investor jumps on the bandwagon, creating the base for a steady run up of the market.
The second phase consist of late investor jumping in, consolidating the trend and making the market moving to higher highs. At this point, valuations climb well beyond historical norms, logic and reason take a back seat to greed.
Usually, but not always, the end of this phase witness one last parabolic move, when the largest gains in the shortest periods often occur. This is the pick of the iceberg when bullish sentiment transforms in euphoric joy. The sophisticated investors, experienced traders, are already out of the game taking home good profit. Who is left in the game?
People like the owner of your favorite restaurant, your butcher, and even your accountant.
~ 4. Distribution Phase
This phase is very emotional because investors have a mixture of feelings about the market; fear, greed and confusion.
In this phase, the market stall, move between double and triple up and down. The seller dominates the distribution period.
The sentiments slowly start to change, but sometimes if bad news makes headlines, fear start to spread at fast speed and the market start descending.
For most people these cycles aren’t obvious, but they exist. The smart investors whom take advantage of the cycles can benefit greatly on their investments.
Just by following the cycles in any market, your returns will get a bust. Let’s take for example the most stable market of all, the S&P 500. For the last 100 years, this index has return approximately 9%.
No bad, isn’t it?
For contrarian investors (these are the folks use the cycles to their advantage), the return would have been almost double depending on entrance and exit points.
Cycles Are Important To Us
There are so many cycles out there, but three stand out in my investment strategy; Economic Cycle, Correction Cycle and Momentum Cycle.
This cycle lasts between 6-10 years. The beginning and end are defined by a recession where the market correct. It’s crucial to determine where we stand in this space of time to take long view decisions.
After a correction/recession, this cycle will trend up in the long term, in most cases for around 7 years. Market Oracle has written an interesting article about the Stock Market 7 Year Crash Cycle that is worth the read.
There will be a series of correction within this trend, which will offer an opportunity to add extra cash to the investment. This brings us to the “correction cycle.
This cycle arrived without clear warning, usually follow by some change of monetary policy or noisy economic panic news. Whatever the reason the economic cycle uptrend temporary get stopped, it’ an excellent time to put in some cash into sound investments when swing cycle bottom.
The occurrence of this cycle is between 1-3 times per year and imply drops of stock up to 23%. The black Monday, 19 October 1987 is a well known event that maximize the example for a correction cycle.
When that occurs, it represents an exceptional buying opportunity within a bull market in which markets will typically rally 5% – 15% in the following months.
Short in term of time, below one week. This type of trend can provide quick profit with downside risk, but upside rewards.
Usually, a stock’s volume will pick up and set for an upside or downside trend, basically, you follow the trend. Having a “stop loss” is mandatory for this type of trading.
Profiting From Economic Cycles
The key to profit from cycles is identify turning points before a trend change. You want to know the direction of the trend, identify pullbacks and alert us to price swings before they happen.
Cycle analysis will become an essential tool for your long term success as investor and trader.
Volume; Most Important Indicator?
It’s a psychological indicator which tells me how committed are individual at any specific moment. Understanding the movements of the market, as it relates to volume, is essential for your success.
High volume with an uptrend, tells me people want badly this investment. Instead, high volume with down trend price, tells me investors want to get out from this investment.
These are only general rules because sometimes there are fake signs taking place. Sometimes the stock price collapses briefly because traders are taking profits but long time investors are very interested in this investment.
So, you need to analyze each investment in a way that goes along your strategy.
During the “economic and correction cycle”, the stock prices are cheap compare to the previous years. You don’t know witch stock to pick because they are all bargain.
The best thing to do, it’s just to pick your favorite and let them increase in value.
You know you are near a “downturn cycle” when you can’t pick a stock for the opposite reason, all the good companies are expensive.
So, what to do?
The best thing is to do “nothing”. Wait for the recession to strike and bring down the prices to a better value.
I hope the cycles open your mind to a new way to trade your money. Knowing this important piece of information, will help you to prepare a sound trading strategy.
How are you planning to protect your finances? What about profiting? Are you going to to plan differently your investment future? Share your thoughts in the comments below!