Block Tides: The Cycle of Market Emotions

Like many things in life, markets run in cycles, and no matter what kind of market you are in, you should know and expect that there will be bull and bear runs. A bull run is when investor confidence is high where the majority are buying, increasing market prices. On the other hand, a bear run is the opposite. It is a period when market prices go down due to market fear, and supply outweighs demand pushing down prices. It happens so frequently that experts have identified its different phases.

Listed below are the phases of the cycle of market emotions:

• Optimism
• Excitement
• Thrill
• Euphoria
• Denial
• Anxiety
• Fear
• Depression
• Panic
• Capitulation
• Despondency
• Skepticism
• Hope
• Relief

Optimism

The cycle usually starts with the phase of optimism. The general market sentiment is positive when investors are willing to invest or to look earnestly into new investment opportunities. A trigger for this phase can be an introduction of new technology, regulatory reform, a new government, rapid growth in corporate earnings, or a positive fiscal report from a reputable market watchdog.

Excitement

The next phase in the cycle is Excitement. Not only do investors feel optimistic about the market, but they are eager to participate in it. This phase usually happens when investors begin to understand the market potential and have identified which markets they want to participate in. Demand surges as investors execute their bullish investment strategies, increasing prices.

Thrill

This phase is similar to the previous cycle but to a higher degree. In this phase, investors are more eager to participate in investment opportunities. They are in a hurry to enter the market, and there is too little time to conduct proper due diligence. Herd mentality starts to set in, and Investor confidence is high with the majority of the market on green

Euphoria

This is the phase where herd mentality is in full swing. It is a seller’s market as prices are at their peak. Many investors at this stage are experiencing the feeling of Euphoria, with many inexperienced traders foolishly thinking the market will continue to rise. It is also when traders experience the pinnacle of their greed.

Denial

In this phase, they will experience a correction. It signals the start of the end of the bull run. Many traders are still intoxicated with the gains of past phases and do not heed the “writings on the wall.” Market buyers who continue to buy are “buying the top”, which is the least optimal way of investing.

Anxiety

At this phase, many traders begin to unload their bags. The bears are gaining momentum, with markets generally moving southwards. Traders who buy during this phase are “catching knives” as markets continue to experience lower highs and lower lows. Market confidence deteriorates rapidly.

Fear

The market sentiment in this phase is overwhelmingly negative. Market prices continue to decline as buyers are afraid to take up positions. This fear spreads like wildfire and intimidates would-be investors entering the market. Traders who continue to hold on to their assets become “bag holders.”

Depression

Market prices continue to decline, with buyers increasingly scarce. It has become abundantly clear to many traders that the market will not recover anytime soon. The majority of the traders have a very negative outlook, with many of them exiting their positions and transferring them to “safe-haven assets.”

Panic

As there seems to be no end to the market downturn, panic sets in fear index enter an all-time high. Although unlikely, there is a predominant feeling of assets going to zero. “Weak hands” are shaken off by many investors panic-selling their invested assets with fear of losing all their value.

Capitulation

In this phase, investors give up on their investments and sell them. This is the time when the market hits rock bottom. The majority of the investors get beset with the feeling of hopelessness. Ironically it is during this time when investors can make generational wealth, assuming they can spot the bottom and invest in assets that will rebound significantly.

Despondency

This next phase is very much similar to the capitulation phase, where there is an overbearing sense of hopelessness. However, there is no significant price action on the markets. It is viewed as an inflection point where the market tends now to move sideways. Like the previous phase, it also presents the greatest financial opportunity for traders.

Skepticism

The markets begin to show some signs of life during this phase, but a lot of doubt is still in the minds of many investors, especially those who lost money during the last bear market. The market still tends to move sideways but now shows a slight recovery. Traders are now cautiously looking for investment opportunities.

Hope

Market sentiment during this phase is generally positive now. Investors begin to regain market confidence and return. This phase rejuvenates the markets, and many hopefuls are now entering the market. Market prices are recovering as more traders are taking up positions, confirming the beginning of a new bull cycle.

Relief

The bull run is now in full swing during this phase. Market prices now experience higher highs and higher lows. Investors have regained confidence in the market, providing the much-needed relief to revitalize it. Marking the start of a bull market as the cycle goes back to the optimism phase.

Notable Points in the Cycle of Market Emotions

If we look closely at the cycle, we can easily identify groups of phases that can be lumped together. The first two groupings are as followings:

Group 1: Excitement, Thrill, and Euphoria

Group 2: Denial, Anxiety, and Fear

In between these two groupings, beginning in the Euphoria stage is the point of maximum financial loss. This means the asset bought during this point is more likely to incur an investment loss. FOMO (fear of missing out) is at its highest during this stage and the prevailing market sentiments.

The following two groupings are the opposite.

Group 3: Depression, Panic, and Capitulation

Group 4: Despondency, Skepticism, Hope, and Relief

The middle of these two groups represents maximum financial opportunity. Prices of market assets are at their lowest during this time. However, the prevailing FUD (fear, uncertainty, and doubt) hinders would-be investors from taking positions. Assets bought during this point are more likely to increase their value since prices have reached rock bottom.