The Economic and Financial Market Cycle

The 7 Phases of the Financial Markets

Based on the World’s Economic Cycle.

1. Bottom of the market – Time to buy Junk Bonds short term.

2. Beginning of the next bull market – Time to buy stocks that have been beaten down by the market and the economy.

3. Bull Market is over 2 year old – You should be fully invested in stocks and bonds. You should have little investment cash left. You are in position to take advantage of the next great economic and financial move up.

4. Everyone including your dog, cat, and the groundhog digging in your back yard is talking about how well the market is doing and how they are going to make a killing in it. Junk bonds are only returning 3% to 8% and most of your target investments are selling at par or at a premium. This is the top of the market. You should be careful of Junk Bond purchases. In most cases I would not purchase Junk Bonds at this time. You should be getting out of stocks or if you have an advance education in how stock transactions work, you should look for “Short Selling” opportunities.

5. The start of a Bear Market – This is the time when the people on TV, Radio, and in the Newspapers start mentioning a correction. They will call it "Profit Taking." The market starts going down and the Market Experts start talking about buying opportunities. You should be accumulating cash in your portfolio in the form of CDs, Treasury Bills, and etc. You are well into your “short” positions and they are making money fast. The market always falls faster than it went up.

6. The Bears on Wall Street are tearing up the place. At this time the market is falling fast and it becomes front paper news. People at work and on TV are talking about how bad the market is and how much money everyone is losing. Companies are starting to report financial trouble and news people are starting to report companies that you know and use that are filing chapter 11. You are accumulating cash in your accounts and watching your “shorts” make money.

7. The people at work are selling their stocks and mutual funds at a loss. Everyone is blaming everyone else for the failed economy. You should be checking the Junk bond market looking for opportunities such as short term bonds (maturing less than 1 year) selling at deep discounts and yielding over 10%. It is time to start buying. The market is at or near the bottom.


The world economy has a cycle. The stock and bond markets are leading indicators of this cycle. These seven phases may happen as little as 4 years and as long as 20 years. If you pay attention to where you are in these cycles, you can make money by using them to invest in stocks and bonds. Stock prices are depressed at the end of a recession or depression. Junk Bond yields are relatively high compared to other times in the economy. The public is not buying at this time because of the shock of the past stock market disaster. The public generally will not buy Junk Bonds because they have been “brain washed” against them. This is the best market buying opportunity in the economic cycle.

My dog thinks in the present. She only wants food when I have it or she is hungry. She never thinks that she will be hungry next year and how to prevent that. When it comes to investing at the bottom of the market, people never think that stock prices will be higher next year at this time or bond yields will be lower pushing up the price of bonds. At the top of the market, people never think that stock prices will fall a year from now. That is why most people buy stocks when the market has already entered its final phases.

The investor and speculator build their portfolio in the first two years of the Bull Market. At the end of the second year they should be fully invested (over 90% invested). It is hard not to follow the crowd when it comes to the market. But if you think about it, the crowd can’t be right because there is not enough money to maintain a bull market if the crowd is in it fully invested. At the top of the market, it must contract because of it own economic weight. That is why most people lose money in the stock market. Here is why when everyone is talking about making money in the stock market and the TV News Stars are putting it on the 6:00 news, it is time to get out!

At this point, you know that a bear market is coming. You have to prepare for it just like you prepare for a Bull Market. This is when you sell your stock, “short sell” your stock, or buy such things as CDs, Treasury Bill, Money market funds, and things that are highly liquid and does not go up and down in price. (We will spend a full lesson on Short Selling later..)

Then you look for signs that the bear market is just about over. These signs are Junk bonds yielding 10% or more with maturities less than one year. The stock market stops falling in the past 3 months. Everyone is losing their jobs and companies are filing for bankruptcy. This is when you start buying Junk Bonds and as the market start moving up by say 20% since the bottom, you start buying beaten down stocks.