Stock Market Cycles Explained! (The basics)

Stock Markets move up and down in recurring cycles. A prolonged rise in stock prices is known as a bull run while a consistent decline is called a bear market. These are different from short-lived upward or downward “corrections” in stock prices. Typically, a bull run or a bear market means at least a 20% change in the index value. Nobody can accurately predict stock market movements, but they can be explained. Here’s what moves the stock markets.

Bull Markets:

Bullishness in the markets can be the result of an economic boom which in turn fuels optimism among investors. The stock markets around the world witnessed the longest bull run during the past five years giving spectacular annualised returns of nearly 50%.

Indicators of a Bull Run:

• Rising corporate earnings
• Low inflation
• Low interest rates
• High fund flows and liquidity
• Increased investor interest

Bear Phases:

Bear phases occur in times of an economic downturn and when there is all-round pessimism. Unlike a correction, a bear market is marked by a consistent fall in stock prices over a long period of time. The New York Stock Exchange and markets of the world are currently in bear phase since the beginning of this year. The markets have lost almost 50%.

Indicators of a Bear Phase:

• Falling corporate earnings
• Rising inflation
• High or rising interest rates
• High fund outflows and liquidity crunch
• Low investor interest

Selling Short

• Bearish markets and falling stock prices don’t always mean losses. You can also profit from falling prices if you use the right strategy and are able to take quick decisions.
• The most common bear market strategy is short selling-or selling shares you do not own in the expectation that the price will fall. When the price falls, you buy back the shares at a lower price.
• Buying back shares to square a position is called short covering. The difference in the price is your profit. Of course, this is risky gambit and can result in a loss if the price rises after you sell.

How Selling Short Works

Suppose you short sell 500 shares of a company at a price of 10$ each. You are expecting the price to fall to 8$. Then according to the table below:

500 shares short sold at $10	Scenario 1: The share price falls	Scenario 2: The share price rises
Stock price	8	11
Difference from your selling price	-2	+1
What you pay to buy back shares	4,000	5500
Your profit (or loss)	1,000	-500

All figures in $

Keep In Mind

• If you are unable to square short selling, the exchange buys shares in an auction and gives them to the buyer. That can lead to losses if share price is higher.
• Discipline is important. Buy back shares when the target price is reached. Similarly, set a strict target to cut your losses and buy back if the price starts rising.
• Don’t wait till the fag end of the session to buy back. Short covering can push up the price of a share as short sellers scramble to buy back.
• Too much short selling can cause a share to be oversold. That is actually a bullish signal as short covering may cause the price of the share to go up.