Market Cycle Investing Guide: 4 Stages & 13 Emotions
Understanding the market cycle can seriously boost your investment game – whether you’re in stocks, crypto, gold, or other assets. In this guide, I’ll explain the four market cycle stages and the 13 investor emotions that typically go with them. You’ll also get a blueprint for how to invest (or not invest) within each market cycle stage. So, let’s explore how the market cycle drives investor behavior and asset prices – and what you can do about it.
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I’ve created a condensed PDF version of this guide, which you can download through the form below. Use the PDF as a market cycle investing cheat sheet.
Market cycle stage #1 – Accumulation (price builds a base)
The market cycle has four main stages: accumulation, markup, distribution, and markdown. Each stage reflects different stages of price action and investor emotions. The accumulation stage happens as the market bottoms out, and “smart money” investors start buying (or accumulating) investments at lower prices. Market sentiment is mostly negative here, but prices begin to trade sideways as the downtrend loses steam. This stage can last for a few months or many years – depending on the severity of the bear market before it.
Example of accumulation stage: US stocks (S&P 500)
The US stock market’s last accumulation period took about nine months – from around July 2022 to March 2023 (see chart below). The bear market before this accumulation stage was relatively short (40 weeks from top to bottom), with the S&P 500 down only 27.5%. Note that the accumulation stage started before the index bottomed. The smart money began buying stocks at what they perceived to be good value – before the actual low. Notice in the chart how the price made slightly lower lows while the relative strength index (RSI, blue) made slightly higher lows. That signaled bullish divergence – a sign that buying pressure was getting stronger and accumulation was underway.
Investor emotions in the accumulation stage
The Wall Street Cheat Sheet’s Psychology of a Market Cycle lists 13 emotions that investors experience during a typical market cycle. In the accumulation stage, anger and depression are the name of the game. First, investors get angry because they’re down on their investments. Then, they get depressed because the market takes forever to recover. But as investing legend Sir John Templeton would say “The time of maximum pessimism is the best time to buy”.
How to invest during the accumulation stage of the market cycle
During the accumulation stage, you want to follow the smart money and accumulate investments at a discount. But remember, accumulation stages can take a long time to play out. So your best bet is usually to build positions slowly by dollar cost averaging (investing smaller amounts at set intervals). Look for quick downward moves during the accumulation stage – and buy near the bottom of the trading range. You’ll also want to check for bullish divergences between the price and the relative strength index (RSI). Remember, this can signal an increase in buying pressure – even though prices might still be trending lower.
Market cycle stage #2 – Markup (price goes up)
The markup stage follows accumulation and involves rising prices and increasing investor interest. The price chart makes higher highs and higher lows, forming an uptrend. Whenever the price drops, investors step in to buy the dip, getting greedier as the markup stage goes on. Momentum traders and latecomers who were initially skeptical also jump in, driving prices higher at a faster rate. That’s why you often see the biggest price gains in the final innings of the markup stage.
Example of the markup stage: US Dollar Index (DXY)
Here’s a recent example of a markup stage for the US dollar index (DXY), which rallied 28.7% from bottom to top in just under two years. Notice how the markup started slowly before picking up pace near the end. Also, see how the 20-week moving average (gold) of the DXY sloped upward and supported the price for most of the rally. The DXY finally peaked when the trade was very popular – not when investors shunned it.
Investor emotions in the markup stage
The markup stage of the market cycle usually has a wide range of investor emotions. In terms of the Wall Street Cheat Sheet, it tends to start with disbelief. Investors have become accustomed to prices going sideways or down, so they’re skeptical of the initial turnaround. But as the uptrend builds, hope kicks in, and they start believing in a possible recovery. Next comes optimism and belief – as the market booms higher and investors get “fully invested”. That turns into thrill as more people buy on margin (borrowed money) and prices start to peak.
How to invest during the markup stage of the market cycle
During the markup stage, you typically want to hold onto your investment, and avoid selling too early – the trend is your friend, after all. That said, it’s important to stay disciplined and not get carried away by the excitement. If you’re going to buy an investment in the markup stage, consider buying the dips (not the rips). This way, you can get a relative margin of safety with your investments. You’ll also want to monitor moving averages to gauge whether the uptrend is still your friend.
Market cycle stage #3 – Distribution (price stalls)
The distribution stage is when the smart money (who likely bought in the accumulation stage) starts selling their positions. These investors are already sitting in substantial profit, and they’re cautious about the market’s froth and irrational exuberance. Distribution stages can often take a while, as the market forms a topping pattern like an M pattern or head and shoulders pattern. You might also see bearish topping candles with high trading volumes as smart investors sell to the (often leveraged) latecomers.
Example of the distribution stage: Long-dated US treasury bonds (TLT)
See the IShares 20+ Year Treasury Bond ETF (TLT) in the chart below. It rallied 60% over 70 weeks. But in March 2020 – as the pandemic rattled markets – TLT had a major “blow off top”. The price then took about a year to form an M pattern, which became part of an even bigger head and shoulders pattern between mid-2019 and early 2022. There was also bearish divergence between the price and relative strength index (RSI) – a sign that selling (or distribution) pressure was strengthening despite rising prices.
Investor emotions in the distribution stage
The distribution stage usually starts with euphoria among investors, where leverage, margin, and speculation are peaking (along with the investment’s price). That’s usually when the first big wave of sell orders comes in, pushing the price down to drown the late buyers. Since many investors still have their “buy the dip” mentality from the markup stage, the buyers fight back, believing that prices will recover and the good times will continue. Investors then become complacent as prices stall and volatility cools off.
How to invest during the distribution stage of the market cycle
During the distribution stage, you obviously want to avoid buying on margin. If you’re already in profits and bought the investment early, consider selling a good chunk of your position. If you haven’t bought the investment yet, it’s usually best to stay out of it – and look for another asset that’s in a clear accumulation stage instead.
Market cycle stage #4 – Markdown (price falls)
The markdown stage happens when prices begin to drop as selling pressure rises. Investor sentiment turns negative, leading to more selling, and so on. This causes the price chart to trend down, with lower lows and lower highs. When the market bounces, investors tend to sell or short the rip. This stage continues until excess leverage and speculation are flushed out of the market and prices begin to bottom out again – i.e., until the next accumulation stage.
Example of the markdown stage: Bitcoin (BTCUSD)
Bitcoin tends to have incredible bull markets, followed by viscous bear markets after each distribution stage. After Bitcoin’s 2021 peak, for example, it crashed 77.57% over 54 weeks. Notice how Bitcoin’s 20-week moving average was sloping down most of that time, often acting as a ceiling on its price. The accumulation stage after the markdown coincided with the flattening of that moving average.
Investor emotions in the markdown stage
The markdown stage usually begins with investor anxiety, as the “dip” turns into something worse. Leveraged investors get margin called, forcing them to close their positions, which triggers even more selling. Then comes denial as prices keep dropping, which eventually turns to panic. The markdown often ends with capitulation as investors give up and sell their investments at the worst possible time. That leaves them with anger because they lost so much money.
How to invest during the markdown stage of the market cycle
When prices are falling, the temptation is always to buy the dip. But what if the dip keeps on dipping? Instead of trying to catch a falling knife, it’s usually better to stay out of the market during the markdown. Instead, wait for clear signs that the accumulation stage has started before buying.
Final thoughts
Like it or not, markets are designed to extract money from emotional investors. So, the key is to not invest based on your emotions. That said, it’s crucial to still keep track of your emotions when investing. Because if you feel a certain way about the market, chances are many others do, too. That knowledge can help you determine the most likely market cycle stage, so you can act accordingly.
Summary table of the market cycle with key takeaways
To wrap this up, I’ve included a summary table to help you identify each market stage, its usual investor emotions, and what’s usually the best thing to do as an investor:
| Market Stage | What Happens | What Emotions | What to Do |
|---|---|---|---|
| Accumulation | Prices build a base, trade sideways. | Anger, Depression | Accumulate slowly, dollar cost average, buy dips, look for bullish divergences. |
| Markup | Prices rise, higher highs and lows. | Disbelief, Hope, Optimism, Belief, Thrill | Hold investments, buy dips, monitor moving averages. |
| Distribution | Prices stall, form topping patterns. | Euphoria, Complacency | Avoid margin, sell positions, avoid new investments. |
| Markdown | Prices fall, lower highs and lows. | Anxiety, Denial, Panic, Capitulation, Anger | Avoid buying, wait for signs of accumulation stage before buying. |
The usual disclaimer: none of this is investment advice, it’s just for information and education. If you liked this market cycle guide, check out our free technical analysis course to learn to invest with less emotion and more analysis. You can also read or watch our Wyckoff Method guide to learn more about market cycles from a slightly different angle.
