The Four Stages of Stock Market Cycle

SYNOPSIS

Stock market cycles reflect both psychology and fundamentals. Smart investing means understanding trends avoiding hype, exiting before crashes and entering when fear prevails. The key isn’t predicting the future but reading the present with clarity. Where do you think we are in the cycle today? Let us understand the stages of stock market cycles.

Understanding the Four Stages of the Stock Cycle: A Visual Guide to Buying and Selling Trends in Financial Markets.

What Are The Four Stages of Stock Market Cycle?

Like nature, the stock market runs in chakras (Cycle). There are predominantly Four (4) stages in the cycle of stock market.

These include –

1)       Accumulation Phase

2)       Markup Phase

3)       Distribution Phase

4)       Markdown Phase

Understanding these four stages can help investors to give time to their strategies and avoid expensive emotional decisions. More importantly identifying these steps helps investors to coordinate their portfolio with the market's mood, sector rotation and institutional features.

Let’s explore each phase in detail with facts –

1.     Accumulation Phase –

The accumulation phase marks the initial phase of market recovery which provides a great opportunity for strategic investors. Following the recession, prices stabilize at lower levels and institutional investors quietly buy strong shares for discounted rates. For example – In April 2020, After Covid crash, Mutual Funds quietly purchased shares of HDFC Bank, Asian paint and TCS despite the market fear.

Retail investors often avoid this stage and miss this opportunity while the Domestic and Foreign Institutional Investors (DII/FII) activity start the trend of accumulation as this phase is ideal for long term investment in strong companies which are at stable prices due to recession and are ideal for future benefits.

2.     Markup Phase –

The markup phase marks the resurgence of confidence within the market, driving prices higher and broad investor participation. As positive news surfaces, the prices of stocks rallies attracting retail traders eager to capitalize the opportunity in the uptrend.

Sectors like Auto, IT & Infrastructure often lead the charge by this optimism in the market. Sector rotation plays a crucial role in this phase, as investors shift focus from defensive stocks to cyclicals, with IT, infra, and auto showing strong performance.

Between late 2020 and 2021, Tata motors surged which it ambition to enter in EV space, Similarly, Infosys reached new highs ad FII’s & retail investors played a significant role in upward of the price.

3.     Distribution Phase –

The market reaches a significant turn when stock prices stop hitting new heights, signalling a peak. While retail participation remains strong driven by market hype and also the IPO buzz. The valuation of these IPO’s are rich in valuation when they go public.

A notable example occurred in 2022 when enthusiasm around Zomato, Paytm and Nykaa's IPO’s quickly turned volatile. Early investors, sensing overvaluation, cashed out, while retail traders rushed in despite the risks.

4.     Markdown Phase –

The Markdown phase is characterized by a decline in steep valuation increased fear and widespread panic selling. Retail investors often offload shares at loss while institutional players are patient waiting for favourable condition. Defensive sectors like FMCG and pharmaceuticals tend to weather this downturn better than others. A notable example – Yes Bank’s dramatic fall from over ₹400 to below ₹50 in 2018. Despite warning signs, many investors held on too long, resulting in heavy losses. Interestingly, during this phase the fear dominates, it finally lays the foundation for the next accumulation cycle, providing opportunities for strategic investors.

Abdul Wahhab Khan