Market Cycles Many believe that "the future market depends only on the decisions of those who are buying and selling
and this behavior is therefore unpredictable.
This thesis states that as happens with earthquakes, we can predict that in the coming years
produce a bearish or bullish, but not how to be neither
when. Otherwise everyone would be a millionaire. This feature was uncertain stock market that economists of the early twentieth century considered useless to analyze their swings. But with the advent of statistical science, everything changed.
To anticipate disaster and caused the Great Depression of 1929, since the 50
began proposing major analysis methods
stock market. Among these are the fundamental analysis, based on the study
figures on the stock exchange companies whose shares are to buy, their
future expectations and their ability to generate profits, and technical analysis, whose support is the data (training) produces the market itself, as
share price, trading volume, etc. Finally, multiple cycles
theories based on the fact that he always follows a rise
a fall. There are many: ranging from 64 years to those who say the Bolsa
goes down on Friday and Monday. Faced with all these predictive methods in recent times appeared
physics-based models, such as chaos theory or random walk
that support the total inability to predict the stock market
. We have seen that there are several factors involved in the Bag (fundamental, psychological, structural and technical) and any event can change the trend in an unexpected way.
Sectoral Cycles, Cycle Psychological and Stock Cycle
A common denominator in most of theses cycles is the traditional "advance" who watches the stock market cycle to cycle on a country's economy. This development is estimated to range from six to twelve (6-12) months. Attention is also the coincidence of movement for business sectors that are traditionally seen in the stock market cycles. Last but not least, is worth addressing the psychological cycle of the investor, a volatile element without doubt but certainly repetitive, very characteristic of our humanity that gives rise to mass reactions. Sectoral Cycles
repetitive patterns of ups and downs in business sectors across the business cycle has allowed economists, analysts and investors for decades to identify the cycles, when the economic cycle and the stock market.
Certain business sectors traditionally often behave (advance or decline) at a different rate than general economic and stock market cycles. These gaps provide "clues" that can contribute significantly to stock market investment strategies.
For example, the traditional financial sector leads the stock market and is one of the first to fall when the market is at "peak" and is one of the first to advance the latter phase of a market low (" Bear "). The transport sector is also one of the most strong reaction at the beginning of a bull market ("bulls"), but it is usually suffer the most (down) at the first signs of a bull market is near.
is the long-term variation of contributions leading to the primary trend of the stock market. Usually these cycles coincide with economic cycles with a preview from 6 to 12 months.
The following chart illustrates the gap between stock market cycles and the economy. In the market cycle also identifies behavior that historically observed the different business sectors during times of ups and downs.
sectoral cycles within economic cycles and stock cycles. Cycle
Investor Psychological
A feature of our human race is undoubtedly predictability. We tend to behave very similarly to similar stimuli. This is reflected in our daily attitudes. On specific issues such as investment, consciously or unconsciously, our feelings
permanently move between ambition and fear. This explains why stock market participants generally become too optimistic when markets are rising and very discouraged and fearful when the cycle low of a market becomes stronger.
is for this that our stock investment proposition due to the implementation of comprehensive methodologies to consider fundamental aspects of the selection of stations, intelligent allocation of portfolios and appropriate reactions to possible changes in trends (cycles) and in market discipline and patience are essential. That is, away from the "hunches, rumors and"
flock "to make objective decisions.
Many experts insist that the typical behavior of investors is linked to the known cycle of investor psychology as graphics and features at each stage presented below
Disinterest
: According to the cycle, a rising market usually starts when the market is down and investors have little interest or disdain for stocks.
Doubt and suspicion: They try to decide if they invested had been invested in a safer place like a money market fund. They worry about their actions and promise to never invest again.
Caution: The market begins to show signs of gradual recovery. Most investors remain cautious, but prudent investors are even more excited at the prospect of winning.
Trust: As prices rise the shares, the feeling of distrust of investors confidence and finally turns to enthusiasm. Most investors buy shares at this time.
Enthusiasm: During the enthusiasm stage, prudent investors are already taking profits and getting out of the stock market because they realize that the rise is coming to an end.
Greed: The investor enthusiasm remains the ambition that often accompanied by numerous public offerings in the stock market.
Indifference: Investors look beyond the valuations (multiples) that indicate trouble staying high.
Dismissal: As the market drops, investors show a lack of interest that quickly turns to dismissal.
Disclaimer: the denial stage comes in regularly affirm their belief that the market definitely can not fall lower.
Fear, Panic and Indifference: The concern is beginning to take hold, panic, disinterest and disregard soon follow. Investors are beginning to despise over the market and promise never again to invest in stocks. HYPOTHESIS I.
MARKET CYCLE ANALYSIS
argues that the Exchange is subject to boom and bust cycles of years, months, weeks and days. These are linked to factors such as fluctuation global economy, interest rates, the price of gold and silver, or mass psychology. Based on these factors have been established over many cycles. For example,
the "long Kondratieff cycle" that ensures that the trend changes every 48 or 64, or Samuel Benner, which predicts that stock market highs are repeated every eight or nine years and the minimum every 16, 18 20: since 1913, when it was established, this cycle has been successful with small margins of error. This type of analysis enables a tendency to place short or long term, but many experts are not quite scientific and always has a margin of error.
HYPOTHESIS II FUNDAMENTAL ANALYSIS
Through this study the situation of a company find out if the fundamental value (financial quantitative and qualitative) of shares corresponds to their market value. This will divide the value of the company by the number of shares traded. The result is the fundamental value of each share. If the market value of the title is below the fundamental need to buy, if above, must be sold. From this approach appear in multiples valuation methods (P / U, P / BV, FV / EBITDA, etc.)..
The 8 basic criteria
• sector perspective,
• perspective of the company's operating results,
• market addressed,
• profitability
• financial strength,
• Valuation, Liquidity and
• • Others, such as dividend policy and
qualitative and brand recognition, the board, etc.). HYPOTHESIS III
TECHNICAL ANALYSIS (GRAPHIC)
It ignores the reality outside their own market and only relies on the numbers (price, volume, trends, training, etc..) Related to the stock market. Analyzes the behavior of prices, flows into and out of orders purchase, how often a stock rises or falls more than the rest of the market and the movements of large investors (funds and institutions). With all this provides graphics that can provide real-time data (from a few years ago thanks to the internet). Sometimes, this method also takes into account the so-called analysis of public opinion or feeling, based on feedback from the experts.
Is Better?
There is widespread debate in this regard. Although its acceptance and success depends largely on the type or profile of the participant. The most common is the technician may easily access the price information about key business and a focus on shorter-term results. But you can not ignore the other types of market analysis to get it in a holistic manner.
The combined use of these methods or complementary
insisting on giving priority to care only about finding risk of earnings:
1) Make the selection of stations from the core, and
2) Decide time trends from technical.
An alternative approach considers that, while stock prices can deviate from its economic and financial fundamentals (see the current and expected dividends, interest rates and other current and expected) in the short term, long term prices actions are determined by its fundamentals. Under this interpretation, the main stock market bullish and bearish cycles reflect changes in perceptions of the fundamentals and changes in expectations about the future.
Moreover, there are two additional items that say little and which are essential in a longer-term equity strategy at Bolsa:
1) An adequate and competitive diversification when building a portfolio, and 2) A level aggressiveness in the proportion of investment in the stock market according to the condition
(valuation) market.
ANNEX: "Signs" Full Cycle
Stock
In conclusion, the thesis of the phases that are presented in a full Stock Exchange Cycle and the most common characteristics of each phase.
"The market cycle lasts about five years on average (except that develops in the third phase of the Kondratieff cycle, which has a rising phase of about 6 or 7 years due to speculative excess lasts much longer and, correspondingly, the subsequent downward phase is much stronger), noting its presence in the evolution of stock markets since 1871.
From strictly stock parameters can be described as follows: The prices of the stock market in general, move according to trends, which are classified into three groups:
• Primary: last at least a year and result in a change in their contributions of at least 50%
.
• Secondary: primary bullish trend consists of three (or more) sections upward, interrupted by two (or more) sections bears. Each of the side sections has a duration of one to twelve months. Obviously, each floor of a secondary correction remains above ground of the previous correction. The same is true for a bearish primary trend, but in reverse.
• Minors: each secondary trend is, in turn, It consists of movements or sections under which they have a maximum duration of a month. Here we focus primarily on the study of the phases that make up the two primary trends, giving, at the same time, a brief reference to the economic
short cycle that developed in parallel. " Primary Trend
bull "Bull Market."
Accumulation Phase I:
- The economy is in its worst economic cycle short and corporate profits are very low (losses) expectations of employers are pessimistic . Inflation is starting to reach very low levels.
- Investors who lost money in the downward phase above does not want to hear about stock market, the volume is minimal, the empty shops, the prices listed in newspapers (if they occur) in some corner of the economic department. The more knowledgeable institutional investors (Buffett, Soros, Slim, etc.) Begin to buy. Phase II
Liquidity:
- Having substantially reduced the rate of inflation, the government tries to revive the economy with an expansionary economic policy. The combination of low inflation and monetary expansion results in very low interest rates. Despite this, the economy continued depression of the short business cycle.
- The low interest rates reduce the return on fixed income and this encourages migration to equities. And "experts" buy before the offer is less with the result that the prices rise faster. Phase III
Fundamental:
- Inflation remains low and interest rates. Now the economy is improving.
- The vts. and utility. increase business: First, consumer goods. Once they are working at full capacity, increase sales of capital goods (industrial equipment, construction etc.)
- To the extent that they are obtained, confirming the recovery news economic and corporate balance sheets are showing increasingly better-looking, spread the news that the stock is gaining a lot. The media began to focus on stock market developments.
- A growing mass of money is directed to sustained stock market and pushing up prices overall.
Reversing IV Primary Phase Speculative:
- The economy is in a "boom." Almost all firms working at full capacity, despite the expansion of production capacity have been carried out. All business is good.
- inflation starts to show as a growing danger. Unions against loss purchasing power and full employment pressing for higher wages. Employers offer little resistance because, in a situation where demand for their products is so strong, can easily move these increased costs in higher prices.
- The Exchange takes 3 years and up. Aware and involved many savings in the stock market, hoping for gains than those who came much earlier. The dividend yield is lower.
- In this phase, all media are closely monitoring the stock market (front page news in newspapers). Many people (even with poor financial literacy) is encouraged to buy actions (some of them, after some gains, they are convinced they are genuine financial experts undiscovered until now.)
"On the other hand, the real experts to identify business earnings abnormally high and high inflation threatened to continue the good economic times, they start selling.
- This makes the actions of the best companies, despite the huge number of purchases by the public, show an increased resistance to rise. Then "the man in the street" is released to buy shares in the worst economic situation, and that on that basis had risen very little so far, making their contributions up surprisingly strong start.
Fort Bajada Phase V:
- When money "fresh" entering Bag starts to decline and the market takes time and swinging wildly without a definite trend. There is a sharp decline in trading volumes and begin the doubts among professional speculators on the continuity of the bull.
- These questions are resolved, usually with the rapid sale of their portfolios.
- The fall is vertical and stronger in the shares of companies with the highest trading volume ("do not sell what you want, but what you can") and companies in the economic situation not too good.
- The general public does not believe that a new downtrend has begun, but takes it as a transitional low does the market before regaining its former uptrend. Therefore, not sell, but, perhaps, still buy some more.
- In this is not the only wrong: the media generally fall into the same error of perspective and have the effect to reassure the public that their view is correct (the old error of thinking " while many people can not go wrong. ") Phase VI
"Drip"
- Inflation is high and the government begins to make a policy restrictive economic sign. Interest rates had already started to increase in the phase "Speculative" because of the high demand existing credit, now further up the sign restrictive monetary policy that the government performs. The inflation rate starts to drop, but sales of businesses and profits fall
reduce (including losses): The economic downturn is now clear to everyone.
- Investors suffered a huge disappointment. However refuses to sell it: Trust to see that contributions bought (and then sell and "get table").
- To the extent that some will need the money, in a context of economic crisis, will sell, thus causing the slow and long fall in prices known as "leakage." These sales are not expected to last until the first phase of the new upward cycle (the phase of "accumulation"). At this time consideration will be providing experts to institutional investors (Buffett, Soros, Slim, etc.) Slowly, and are starting to buy, starting a new cycle.
Source: Jbardina.pangeo.org/cicle02.htm
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