4 Stock Market Cycles Every Investor Should Know

History tends to repeat itself, and the stock market is a perfect example of this. While some look at investing as a guessing game, understanding the 4 common stock market cycles can help you make more informed decisions.

We’ve put together this guide highlighting the cycles of the stock market to help you determine when it’s a good time to trade and when it might make more sense to sit in cash – or, at least tweak your standard strategy. These stock market phases are:

• Accumulation Phase (Stage 1): This is seen as the market bottom and a new beginning.
• Markup Phase (Stage 2): The market recovery becomes more apparent and as a result, more investors hop back into the game.
• Distribution Phase (Stage 3): A turning point in which market sentiment starts to shift, some sell early to capture profits while others wait to try and squeeze more profits.
• Mark Down (Decline) Phase (Stage 4): Those who waited too long are forced to cut losses, but contrarians are waiting for the accumulation phase to return.

Successful investing is as simple as identifying the accumulation phase, getting in early, and selling at the top in the distribution phase. Easier said than done, though. 

Learn more about these cycles below – or better yet, gain secrets from market legend Stan Weinstein himself in our stage analysis course at TraderLion and navigate the markets with complete clarity and confidence!

What Are the 4 Stock Market Cycles?

The stock market doesn’t move in a straight line. Rather, it operates in cycles – repeating patterns influenced by economic conditions, investor psychology, and market sentiment. 

Being able to identify these cycles and understanding the nuances of each empowers you to make more informed trading decisions. You’ll have a better idea of when to enter or exit positions for maximum gain. 

Each cycle represents a different phase of market behavior, reflecting shifts in supply and demand, investor confidence, and price trends. So let’s dive into the 4 cycles of stock market phases.

Accumulation Phase (Stage 1)

It all starts with the accumulation phase, which occurs after a market decline or bear market. This period of consolidation involves price stabilization and decreased volatility. In other words, it’s the most lucrative opportunity to get into the market.

Smart money investors, like institutional traders and savvy individuals, start buying undervalued stocks quietly in anticipation of an uptrend. That being said, market sentiment is still cautious and most investors remain skeptical about recovery. 

Key indicators we’re in the accumulation phase are low trading volumes, tight price ranges, and the base pattern formation. It’s the best time to enter positions before the broader market recognizes the opportunity. 

As you can imagine, though, identifying the true bottom is no easy feat. There’s always a risk of getting in too early and seeing the market continue to dip lower. But in the grand scheme of things, patient investors are still rewarded for getting in earlier rather than later.

Markup Phase (Stage 2)

The markup phase is when the market shifts from uncertainty to optimism. Prices start rising steadily on the heels of higher buying interest and better economic indicators. 

More investors enter the market as confidence grows, causing a spike in trading volumes and solidifying strong upward trends. 

This phase brings plenty of media attention, fueling further buying as retail traders jump in. At this point, those who got in during the accumulation phase have already made a solid profit, but those who get in early enough in the markup phase still have room to earn good returns.

Technical indicators like moving averages trending upward, breakouts from consolidation patterns, and increased momentum help confirm this phase. The goal here is to ride the trend while managing risk effectively.

Distribution Phase (Stage 3)

All good things come to an end, and the distribution phase is the beginning of the journey back down. It’s the market peak. Prices plateau as early investors who got in during the accumulation phase start to sell and lock in profits. 

Even though prices stay stable or even continue rising a bit, underlying momentum weakens and trading volumes become more erratic. Indecision takes over during the distribution phase as buyers and sellers are in equilibrium.

Signs of exhaustion start to appear, and more investors close out their positions and convert to cash. Some emotional investors will let their greed get the best of them, hoping that what they’re seeing is just a temporary downswing in a continued push higher.

Candlestick patterns like doji formations and bearish divergences in momentum indicators are telltale signs of the distribution phase. Recognizing this market phase gives you a chance to reduce exposure or shift to defensive strategies before a potential downturn.

Mark Down Phase (Stage 4)

The markdown phase, as you can probably infer from the name alone, signals the journey back towards the accumulation phase. The market downturn kicks into gear and prices start falling as selling pressure outweighs buying interest.

Negative economic news, earnings disappointments, or shifts in investor sentiment solidify this phase as fear dominates the market and panic selling sets in. Sharp price declines can be very punishing if you don’t cut your losses early.

Technical signs include lower highs and lower lows, increasing volatility, and bearish trend indicators. Successful traders recognize that the fun has come to an end and they sit on their cash waiting for the next cycle to begin. 

More aggressive investors will continue to invest during the markdown phase through short-selling strategies, but this can be just as risky as value investing at this point.  

Do All Stocks Follow These Market Cycles?

These four stock market phases can help you invest with more confidence, but you need to take them with a grain of salt. Not all stocks follow these patterns to an exact science. Some may continue rising during the markdown stage, while others will fall in the markup phase.

There are just too many moving pieces to account for in looking at individual stocks and how they behave. While stock market cycles serve as a solid foundation guiding your decision-making, you should account for these factors as well:

• Market Influences: Stocks heavily influenced by macroeconomic conditions (large-cap companies), tend to mirror broader market cycles more closely. In contrast, niche industries or small-cap stocks might follow their own growth trajectories, driven by sector-specific news, innovations, or company performance, regardless of the phase.
• Unique Company Dynamics: Some companies consistently outperform the market. These “secular growth stocks” as they’re known can remain in a perpetual markup phase, showing sustained upward momentum even during broader market corrections. Conversely, struggling companies might linger in prolonged markdown phases despite grander market recoveries.
• Volatility and External Events: High-volatility stocks or those impacted by sudden external events – like regulatory changes, geopolitical tensions, or unexpected earnings reports – can experience abrupt cycle shifts. These fluctuations may take precedence over traditional cycle patterns altogether.

So instead of expecting uniform patterns, analyze each stock within its unique context while continuing to account for broader market conditions. On that note, we want to share a few more tips on using the cycles of the stock market to your advantage below.

Understanding the Cycles of the Stock Market to Make Better Trades

Picking the right stocks is just half the battle. Knowing when to buy, hold, or sell is even more important since that’s where the profits or losses come from. Recognizing the phase the market is in empowers you to align your trading strategies for better results.

Identifying the Current Market Phase

How do you know what market phase we’re currently in the midst of? While talking heads will give you their take, it’s better to do your own research and look for signs such as:

• Accumulation Phase: Look for a flattening trend after a significant decline. Volume tends to be low as prices move sideways. Smart money starts quietly buying undervalued stocks.
• Markup Phase: Prices start rising steadily with increased volume. This phase often aligns with improving economic indicators and growing investor confidence. Higher highs and higher lows are common on charts.
• Distribution Phase: Prices peak and start moving sideways again, with high volume but little upward momentum. Big players are offloading shares to less experienced traders who are hopeful they can capitalize despite metaphorically missing the boat.
• Markdown (Decline) Phase: The market shows clear downtrends, with lower lows and decreasing investor confidence. Panic selling can lead to sharp price drops, and volume often spikes as traders rush to exit.

Having the right technical analysis tools in place is key for this. You’ll need to leverage trendlines, moving averages, and volume indicators to confirm which phase the market is in.

Strategies for Each Market Cycle

Each of these market phases should be paired with a specific strategy. Like we said earlier, there are ways to make money in any of these stock market cycles. 

For the accumulation phase it’s obvious – value investing reigns supreme. Buy strong companies at discounted prices. Slowly add to your positions as the signs a markup is inbound become more clear.

Swing traders tend to thrive in the markup phase as they can ride the momentum with breakout strategies, trend-following setups, and relative strength analysis to capture gains as prices climb. We have a great swing trading course to help you maximize swing trading patterns.

But when the distribution phase starts setting in you’ll want to adopt a far more cautious stance. Tighten stop losses, consider scaling out of positions, and avoid chasing stocks that have already surged. Keep a close eye out for bearish reversal patterns.

By the time the markdown phase is here, you should have already gone on the defensive and converted to cash. If you want to keep chasing returns you can look into short selling or inverse ETFs. Some traders find opportunities in oversold bounces, but these carry more risk.

How Market Cycles Affect Swing Trading Decisions

Swing trading is all about capitalizing on short to medium-term price movements. You can swing trade in any of the stock market cycles but there are varying levels of risk to reward across them. Here are some parting tips:

• Trade Size and Risk: You might increase position sizes and widen stop losses slightly during the markup phase to allow for normal pullbacks in a strong trend. In contrast, you may reduce exposure or switch to short setups during the markdown phase.
• Holding Periods: Trades can be held longer to maximize gains in bullish environments, while quicker entries and exits help lock in profits before reversals in bearish phases.
• Entry and Exit Timing: Market cycles influence price action behavior. For example, breakouts are more reliable in a markup phase, while mean-reversion strategies typically work better during the distribution phase.
• Emotional Discipline: Knowing that market cycles are natural can prevent emotional decisions. Rather than panicking during downturns, you can view them as part of the broader cycle, adjusting your strategy accordingly.

We highly encourage you to learn more about Stan Weinstein stage analysis in our blog or through one of our courses. It’s the best way to understand a stock’s lifecycle and pinpoint the optimal buy and sell times.

This will take the hesitation and guesswork out of your decision-making, empowering you to earn higher returns without the stress and uncertainty associated with investing. Successful trading can be much simpler with the right education, so get started at TraderLion today!

Wrapping Up Our Guide to the Stock Market Cycles

We hope this basic breakdown of stock market cycles leaves you feeling clear and confident in how you can use these market phases to make more calculated, emotionless investment decisions. 

Whether you’re navigating the accumulation, markup, distribution, or markdown phase, recognizing the signs and adjusting your strategy can help you maximize profits and minimize risks.

The key takeaway is that the cycles of the stock market aren’t just patterns, they’re opportunities ready to be leveraged by smart investors. Don’t let them catch you off guard, use them to your advantage. Take the next step at TraderLion now!