One Cycle that Defines Everything in Markets

I've been writing about cycles over the last few months.

I've covered cycles across time frames and asset classes like the 8-year cycle in Sensex. It can even help you identify multibaggers.

You can watch the video.

Apart from this I have also written about the 32-month cycle in Auto index, the 22-month cycle in Metal index, and the hidden patterns in bitcoin as well as gold.

Despite writing so much on cycles over the last few months I'm guilty of missing the most important cycle of all.

This cycle defines everything in markets.

If you could master this cycle, then nothing can stop you from making huge profits.

All publicly traded financial securities repeatedly go through this cycle without fail.

The Four Phases in a Cycle

I have illustrated below the four phases that a stock goes through during its life cycle. The cycle repeats itself after the stock goes through all these four stages.

Stage 1: Accumulation

This is the first stage in the cycle of the stock. The stock consolidates in a range after a prolonged downtrend. It finds buying interest near the lower end of this range.

Value investors who find the stock attractive enter when the general mood of the majority is still negative.

Stage 2: Uptrend

In the second stage, the market condition improves, and the negative sentiment begins to recede.

The stock starts trading above its most recent highs. It begins forming higher tops and higher bottoms. This attracts momentum investors into the stock.

Stage 3: Distribution

The strong uptrend in the previous stage attracts common public in the stock. At the same time, smart investors start reducing their positions gradually.

Every successive rally now becomes difficult to come. Falling volumes on rallies gives us an indication of the exhaustion of the trend.

Stage 4: Downtrend

Lack of a substantial upmove unnerves buyers. They become restless and exit the stock at negligible profit or at a loss.

There are several who think on similar lines. They start selling their stock at lower prices. Falling prices attract short sellers who drive the prices further down at greater speed.

The stock eventually bottoms out and starts trading in a range giving birth to a fresh cycle. Stage 1 resumes once again.

So, this a trader's perspective of the most basic and important cycle in the markets based on price action. But that's not the only cycle that exists in the market.

A business also goes through a similar lifecycle. There are four phases in the business life cycle just like a stock: start-up, growth, maturity, and decline.

A stock's life cycle offers opportunity to make money to all types of investors in each phase.

You should take advantage of it.

But a business life cycle arguably offers the best opportunity to invest in the start-up phase.

Businesses which are in the start-up phase offer high growth potential which big businesses that have already matured cannot offer.

Good quality businesses in the start-up phase tend to significantly outperform in the long-term. Investors who are patient enough to hold on to these businesses are handsomely rewarded.

Institutional investors normally avoid such businesses. They're are busy hunting growth stocks or mature businesses which deliver steady performance.

This is great news for you as there is less competition in this space.

These businesses are normally off most investors radar are not heavily traded. A good quality business, which is growing earnings over time, will attract attention.

As the public becomes aware, demand for the company's stock goes up. When this happens, many investors bid for a limited number of shares on offer. The result?

You guessed it!

The stock price rises rapidly and early investors in these stocks end up with big gains.

Do you know where you will find such businesses?

It's part of the smallcap space.

But this space isn't everyone's cup of tea. Smallcaps are volatile and risky. You never know when you may hit a landmine. That's why it's necessary to have an expert besides you.

I know a person who drinks, eats, and wakes up with smallcaps on her mind: Richa Agarwal.

She has been roaming the country for more than a decade now in hunt for businesses which are in start-up phase.

She knows the ins and out of the management whom she interacts with on a regular basis. She has seen several businesses go from start-up to growth and then to maturity phase...eventually booking profits for her subscribers along the way.

If you want to be among them read this to know more.

Warm regards,

Apurva Sheth
Senior Research Analyst, Fast Profits Report
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Tanushree was live at the Explosive Profits Summit yesterday. Watch it here...