An anatomy of the Stock Market! - Bull & Bear Market Cycles

[bamks]

Lovely Analysis and good insight. The article should be read once every day to remain in focus and not get carried away.

 

[drpsiva]

very informative article.every one has some message from it.thanks traderji.

 

[nick]

An anatomy of the Stock Market! - Bull & Bear Market Cycles

In financial markets, the majority is always wrong. When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market.

The Start of a Bull Market

The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the smart money, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.

The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.

Rising stocks eventually gain the respect of institutional investors, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.

As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPOs generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.

At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think the old rules dont apply.

The Start of a Bear Market

After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.

When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isnt anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors dont sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.

The Cycle Starts Again

It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the dumb money. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually buys low and sells high. After trading in this manner, the dumb money will adhere to adages such as, the stock market is risky. In reality, however, the stock market is only risky if you trade like the mindless majority!

article s something which every trader should read...

 

[ANURAGRAI]

HI
MAY WE B FR I AM a lucknowiest guy and having interest in capital market
THANK YOU
ANURAG RAI

 

[kuriako]

Read the same article here!!!

http://www.stock-market-crash.net/what.htm

 

[surfingminds]

That was nice article and the facts should be known to every investors and traders. The indian market runs more on greed and fear and it is lack of consistant dicipline. And thats what makes more waves more tops and bottoms in this market where the smart money grows and dumb money is lost.

here is a very interesting fact how can you know the market is at top BULL and BEAR by public emotions.

Martket is at bottom and its time when new BULLs will enter is when you ask any samall investor say a PAN shop vendor about the market and he runs away. Indicates that most of the dumb money was lost in market in recent phase which is reflected by the fear on faces of many small or dumb investors.

Market is at top and its time the BEARs will enter is when every one talks about the market. every small investor due to the greed driven by earnings done by smart investors in the past start putting money...

So guys after this long bull which is going and may go ahead due to lot of smart and dumb money still their.
but its time when the second indication that evern one even the ones who were never interested in bussiness started opening demat and buying in the market.


Its always good for the smart investor and I know that they are ready and sense soon the top will come from where the down trend should start .
but as this indian story is bit different and money is waiting for every down the long term down would be dealyed for more time..

Lets see how it goes .
regards

 

[ARUNSUMATH]

It is very useful to all.

 

[anwarsayeed]

Hi,

I am a newbie in this area...

could you Please descibe how the SENSEX \NIFTY points are calculated..???

Thanks in advance
Anwar Saeed

 

[tuaneuro]

how can we identify bear market bottom?

 

[ssureshi]

Well. Interesting article. Most appropriate for Indian market.