Market Cycles, from Rick Foust

November 10, 2007 |

Washing MachineI have been refining a model of stock market emotional cycles for several years . The key phases of the model, from the long perspective:

Bottom, Relief, Distrust, Courage, Anxiety, Confidence, Hubris, Complacency, Top, Shock, Denial, Recognition, Anger, Depression, Prayer, Acceptance Bottom, Repeat.

I believe we are currently in the anxiety phase. Although fear plays a role, combined with other sentiments, in each of the phases, it is dominant in the anxiety phase. As a result, this phase is sometimes a breakpoint.

If market participants are willing and able to cross through the anxiety phase, confidence builds and the uptrend continues. If it cannot be crossed, the uptrend aborts, returning “safer levels,” shorting the cycle. 

The anxiety phase is analogous to a child's losing sight of its mother, or a sailor's losing sight of land.  Beyond here, there be dragons.

I refer to the series of phases prior to the anxiety phase as the recovery period, and the series of phases after the anxiety phase as the heroic period, Throughout the cycle, fear of being left out and fear of being wrong are powerful motivating factors.

The most consistent sentiment indicator is the early morning National Public Radio broadcast.

As an aside, mild fear is a more effective motivator than strong fear. If the feared outcome is too horrible, it cannot be accepted, and is either rationalized away or blocked out completely. This is sometimes discussed in advertising books.

Kim Zussman extends:

There is the same sequence in dating:

Recognition, Anxiety, Courage, Acceptance, Top, Bottom, Shock, Repeat Bottom, Relief, Confidence, Hubris, Complacency, Distrust, Denial, Anger, Depression, Prayer.





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