The Three Stages

I was reading the newspaper yesterday and the chartist exclaimed that Singapore stocks is experiencing stage 2 bear market move and this could last more than 6 years. I got curious to understand about different stages of market.

Firstly, there are two type of movements – primary and secondary. Primary movements represent the general trend of the market which will last for few months to years. Once the primary trend is in place, it will remain in place until a counter trend take over. Daily fluctuations can move with or against the primary trend.

Secondary movements are reactive. In bull market a secondary movement is correction. In bear market, secondary movements are reaction rallies.

There are three stages to both bull and bear markets. 

Stage 1 of Primary Bull 

The first stage of bull market is indifferent compared to bear market. The market sentiment is pessimistic. The news in the market is bad and valuation is cheap. At this stage, the smart investors will start to accumulate stocks. They want to own the stocks in the long run. Stocks are cheap when nobody wants to buy them. 

Stocks have reached a bottom and the price momentum starts to slowly build up.When the market starts to rise, there is widespread disbelief that a bull market has begun. After the first leg hits high and starts to go down, the analyst will say that bear market is not over. If it is a secondary move, then the low is above the previous low, there will be consolidation before an advance will begin. When the leg passes the previous high, it marks the beginning of the second leg and primary bull run. This is the stage of accumulation.

Stage 2 of Primary Bull

This stage will be the longest and there will be great advance in prices. The business sentiment is dovish and stocks will increase in valuation. Earnings will increase and overall confidence level will rise.

Stage 3 of Primary Bull

This is stage of euphoria and speculation. During this final leg, the public is fully involved. When you see the everyday aunties and uncles asking you for the next hottest stock to buy, you know the top cannot be far. It is time to sell all your stocks and get out of there.

Stage 1 of Primary Bear 

Once the intelligent investors realise that the business sentiments start to deteriorate, they start to sell stocks. The public is still in the market buying more stocks. However, the market will start to decline. The media and public will still remain bullish. After a slight descent, there will be a secondary move which reflects the portion of the decline. The rally will be fast and steep. This movement will instill confidence to the public that the bull is still in control. The secondary movement will be lower from the previous high.

Stage 2 of Primary Bear

This is the longest duration in the bear market and usually mark by deteriorating business conditions in the economy, shortfalls will occur in firms, profit margins and revenues continue to fall. The sell off continues to persist.

Stage 3 of Primary Bear

By final stage of bear market, all seems to be lost, the public are moving away from stocks. The stocks become very undervalued, the selling continues. The news are always bad and market continues to decline until all the bad news is fully priced into stocks. Only when the stocks reflect the worst scenario, the cycle begins. 

Is Singapore moving into Stage 2 Bear market?

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