All you want to know but never asked about the stocks and options markets.

martes, 16 de diciembre de 2014

The phases of the stock markets

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The equity markets as happens with the economic activity of any country or group of countries, as may be the eurozone or United States, typically experience during their temporal development a clearly cyclical behavior. This marked rhythm of markets will be detailed for "small and medium investors" in this article in what today we call as "The phases of the stock markets."

There are two types of phases in the securities markets (actually in any financial market) according to the "momentum" of economic activity and these can be very different, depending on the expansion or contraction of the economy, situation of recession or financial expansion and the increment in business benefits that will condition the entrance to one stage or another. These two phases are called bull market (a market with a clear uptrend) and bear market (a market with a clear downtrend) and the trader must take them into account when participating in the investment markets.

The main characteristics of the two types of market phases among others are: 

  • Bullish Stage: In this stage dominates the feeling of corporate and financial optimism, even some investor euphoria. High yields of return and widespread increases in the prices of stocks and other products linked to them such as investment funds (investment funds of equities or mixed with fixed income assets) occur.
  • Bearish Stage:: Unlike the bullish stage, exchange traded securities progressively lose value in the stock price, and there is a feeling of exhaustion of investors, pessimism about the future of the business benefits and rapid corrections of market indices of certain sectors that eventually spread to the market in general.
We must also know some important aspects that present the different phases in the sense that usually bullish markets last longer in their market route that the average length of bearish markets. Likewise, the degree of volatility in the bullish starge is vastly superior to that of the bearish stage.

Advice for different market phases

For less seasoned investors in the world of the stock markets, we will explain the movements or psychological situations that may put a trader "on guard" with respect to the periodic changes in the stock market sentiments which usually are produced by a herd behavior that can leads to abrupt changes in the trend. If these movements or situations are not detected in time may result in substantial losses for the novice investor who can also become "trapped" in a stock for an excessively long period not previously anticipated.

Is very important to detect movements and behaviors that occur repetitively in the market depending on the phase, for example:
  • In a bullish stage: First we have the accumulation phase when better educated and better informed investors are willing to buy the shares to others investors who are unhappy or bored with the falling prices of their securities. The gradual uptrend generated slowly makes that "strong hands" accumulate shares when still no specialized media  do not report the alleged change of market phase.
  • In a downward stage: In this case large investors who hired the services of highly trained advisors with plenty of media analysis start to close their market positions with the foresight or knowledge that the share prices have reached a maximum and therefore their price is excessively high. At first these investors sell moderately with the intention not to scare small investors who "fall into the trap" to think that recent market corrections have been buying opportunities in order to see the continuation of the endless rise in the shares price. The situation worsens and reenters the selling panic when everyone realizes that the market has entered in a lasting downtrend and small bounce pulses or lateral movements are nothing but the beginning of ... More future falls !! !

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