Bull market
Discovery phase
This phase marks the beginning of an emerging bull market trend and goes unnoticed by the majority of market participants.
Stages and Characteristics:
a) Duration – Accounts for roughly 25% of the cycle.
b) Accumulation – Smart money investors sniff out an emerging trend and accumulate in anticipation of a new bull market.
c) Trend emergence – Marked by a gradual bullish price sequence of higher highs and higher lows.
d) Shake-out – The initial rally becomes exhausted and the ensuing decline creates enough doubt that it shakes out the weaker hands.
Momentum phase
In this phase the trend draws in an increasingly larger market participation base as awareness spreads. Growing participation and excitement builds, accelerating the trend and creating strong momentum.
Stages and Characteristics:
a) Duration – Typically the longest segment of the bull cycle, roughly 35% of the cycle.
b) Momentum builds – During this phase the underlying bull market becomes apparent to a broader group of market participants.
c) First sentiment extreme – Attitude towards the market is healthy and able to sustain a strong trend, and sentiment doesn’t become moderately extreme until the end of the phase.
d) Bear trap – Concerns regarding overvaluation and an ending cycle feed a correction.
Blow-off phase
This is the most violent phase of the bull market as it speeds ahead with maximum participation with the least informed (every day investors) joining in.
Stages and Characteristics:
a) Duration – Roughly the final 10% of the bullish portion of the cycle.
b) Renewed optimism – Market participants rebuild confidence following the last correction leading to new highs in the cycle.
c)FOMO – ‘Fear of Missing Out’ sets in as the trend accelerates. During this period the least-informed market participants
d) Euphoria – At this point, many market participants believe the old rules of market cycles no longer apply and that indeed it’s different this time prices will rise indefinitely.
e) ‘Smart Money’ exits – Many smart money managers exit throughout this cycle, but even as such, many sophisticated hedge fund managers are still found guilty of chasing performance.
Bear market
Transition phase
This is where a major turning point takes shape in market psychology, as the cycle shifts from bullish to neutral to bearish.
Stages and Characteristics:
a) Duration – Lasts a small percentage of the total cycle, roughly 5% of the process
b) Shot across the bow – This is the first major decline following the blow-off phase. It serves as a warning shot, marked by a fast and furious sell-off.
c)Bull-trap – The rally following the first decline off the high stabilizes market sentiment for the time-being, giving investors a false sense of confidence.
d) The Lower-high – Buying pressure fades as skepticism leads to selling.
e) Breakdown – Confirmation of a top starts here when the prior low from the ‘shot across the bow’ is broken.
Deflation phase
This is really nothing more than the market moving into reverse, or a bear market, and typically unfolds quickly.
Stages and Characteristics:
a) Duration – Roughly 25% of total cycle, but can vary greatly as the end of the cycle can last years.
b) Fear and capitulation – In this stage, crowd psychology clearly changes as market participants recognize that the bull market is over.
c)Bottom fishing – After significant damage investors seeking value look for a bottom but rallies quickly fail.
d) Despair, end of bear – Disgust reigns supreme as losses reach a maximum. Residual selling dries up.
