The Market Cycle

 

I recently read Robert Kiyosaki’s, the author of Rich Dad, Poor Dad, recent article about the seven stages of a financial bubble which was first mentioned in Nobel Laureate Hyman Minsky’s 1982 book titled Can It Happen Again. The seven stages of a financial bubble as Robert Kiyosaki stated in his post are

1. A financial shock Wave
2. Acceleration
3. Euphoria
4. Financial Distress
5. The Market Reverses, and the Boom Turns into a Bust.
6. The Panic Begins.
7. The White Knight Rides in occasionally.

Stage 1, the financial shock wave occurs when a financial disturbance causes a crisis. Examples include a war, substantial interest rate changes or new technology.

Stage 2, acceleration occurs when something takes place to fuel the boom or the bubble. The example given is the low interest rate that occurred after 9/11.

Stage 3, euphoria is the peak of the bubble and it is rattled with excitement.

Stage 4, Financial distress is the begging of the bust or popping of the bubble and it is when the selling begins.

Stage 5 is when the market reverses and the bust is well known even to the amateurs.

Stage 6 is when the panic begins and the sky is falling. The Financial world is coming to an end.

Stage 7 is when the white knight rides in with stimulus packages to help boost the ecomony and aid in recovery.

At the end of the article Mr. Kiyosaki doesn’t clearly state which stage of the financial bubble he thinks that we are in, but states he is more like a hibernating bear waiting for the party to end and it may be time to get greedy.

Now Howard Marks actually has a recent book titled Mastering The Market Cycle in which he refers the highs and lows of the market as to a pendulum which swings from the market highs to the market midpoint and then market lows and then back up again. Here are the stages of the market cycle per Howard Marks listed below.

The market cycle. 

1. The market top is coined by the phrase buy the dip. The market will aways go up and this occurs near the top of the pendulum swing. It’s impossible to call the market top, and it’s not usually realized until a day or two after it has occurred.
2. Sell the Rally dominates the second phase of the market cycle and its found below the market top as the market is approaching the midpoint. The market is trending downward and it has more dips than rallies and economist and market experts will be encouraging investors to sell the rally because the dips are getting sharper and a bear market may be looming.
3. Stage 3 is characterize by the phrase don’t catch a falling knife. The sky is falling at this point in time and the bear market is in full swing. This typically occurs closer to the midpoint and maybe just pass the midpoint and there is high tension in the stock market and fear is in the air.
4. Stage 4 is doomsday and full-blown panic and pandemonium. The financial world is coming to an end and investors are contemplating filing bankruptcy or worse. This is near the market bottom and once again everyone will be trying to call the market bottom, but it won’t be realized until a day or two after it has occurred.

Now the market cycles doesn’t occur as smoothly as the pendulum swings. No-one knows the velocity or amplitude of the pendulum swing of the market cycle. The market may go from stage 1 to 3 and back up to 2 and 1 again and then suddenly drop to stage 4. The stages may last months or years. It does seem like we are at stage 2 of the market cycle and possibly between stage 3 and 4 of the financial bubble. No-one knows where the market will go next, but it’s more important to know where we are in the market cycle. I am a big fan of Howard Mark’s description of the market cycle and a bigger fan of his recent book mastering the market cycle.