Stock Market Cycle

The stock market ordinarily bottoms out while business is still on a downtrend, anticipating economic events months in advance. Analysts refer to this phenomenon as "discounting of the future." In like manner, bull markets frequently top out and turn down before economic recession begins. Ironically, economists also have a rather faulty record of predicting the economy. A few of our U.S. presidents, themselves lacking sufficient understanding of the American economy, have had to learn this lesson the slow, hard way. Around the beginning of 1983, just as the economy was in its first few months of recovery, the head of President Reagan's Council of Economic Advisors was a little concerned because the capital goods sector was not very strong. This was the first possible hint that this particular advisor might not be as thoroughly sound as he should be, because capital goods demand is never good at the early stage of economic recovery, and particularly so in the first quarter of 1983, when American plants were operating at a low percentage of capacity.

You should check earlier cycles to learn the sequence of industry group moves at various stages of the market. For example, railroad equipment, machinery, and other capital goods industries are late movers in a business or stock market cycle. This knowledge can help you determine what stage of the current market period you are in. When these groups start running up, you know you're near the tail end. Almost always, the really big money is made in the first one or two years of a normal new bull market's upward movement. This, then, is the point in time you must recognize as soon as possible and fully capitalize upon while the golden opportunity is there. The remainder of the up cycle usually consists of back and forth movement in the market averages, followed by a bear market.