The time cycle theory pertaining to the stock market relates to the cyclical trends that repeat themselves after a period of time. Many stock market theorists believe that there are four phases known as the “accumulation Phase” “mark up phase”, “distribution phase” and mark down phase. When the market has completely bottomed out, the early investors will start to buy in.
- When the mark up phase happens, more and more investors will join in. however the problem soft recession and even unemployment in the general economy will still persist.
- When the “distribution phase” comes, many of the investors that have bought in the early phases will also start to sell out. In this case scenario, the market is very uncertain and will bounce back and forth within a trading cycle.
- As the ‘mark down’ phase starts, the investors will start selling out, while others will hold on to their investments in the stock market in the hope that the market will; rise further and they will be able to book profits.
For investors to profit from this kind of time cycle theory, they would need to understand beforehand the phase that the market is currently trading in. This theory has been proposed by Matt Blackman.
Indian stock market characteristics
According to most market analysts, the Indian stock market specifically the BSE Sensex operates on an 8 year period according to the time cycle theory. Many believe that the year 2011 will see the Sensex swing high and low. At one point the Sensex will be as high as 21,000 points while on the other hand it will drop down to 12,500 levels. Accordingly the next peak when the markets will rise quite high would be in 2016.
Time cycle theory affects the markets
Whichever theory an analyst or an investor subscribes to, cycle trends have similar characteristics. Almost all of them are cyclical. So each and every cycle will peak and the go down and bottom out before it will again rise. An Elliott wave is an also a time cycle theory, that shows how the market will perform in terms of 8 waves as defined in the theory. The Elliott wave theory is used by technical analysts to understand how the market is performing and the wave that is currently operational in the market.
The cycles operational in the market can last for a week or for a number of years. The investors must understand the phase of the cycle that the market is operating to earn the profits. Many traders fail to understand the phases in the cycles or forecast the need of the cycle.
The best time for the investors to start buying the stocks and shares is when the market has bottomed out and there is no way other than up that the market is going to go. When people are offloading their stocks, this is the time to pick up the shares (that have good fundamentals) and then wait for the market to recoup.
