Why is Market cyclical in nature?

Many would know that all the free markets, like Stock Market, Commodities Market, Bond Market and etc, behave cyclically. ‘Cyclical’ here means the upside and downside movement of the Market rhythmically between a particular period. We have seen Gold markets move up during the time Stock Markets come down. This is one type of cycle in the Market when one comes down, one goes up. When Stock Markets move up, the interest rates would go up.

Why are these cycles occurring in the Markets? Let me explain the internal dynamics of these cycles. We all know that any Market exists because of the demand and supply for that asset. Let us start from a bear Market bottom of an asset. Let us assume here that the asset being Stocks. During the bottoms the demand for that particular asset would be less and the supply for the asset would be high. Since supply is more than demand, the stock price would continue its downtrend.

At one particular stage, the supply will be completely observed by the Market. Here, the stocks transfer from the people of weak hands to strong hands. Once again here is a small explanation for weak and strong hands. Those who are well informed about the company with strong financial strength can be termed as strong hand, because he wouldn’t sell the stock even if it comes down further. On the other hand, a weak hand is an Investor, who is not financially strong and not well informed about a company would sell his holdings if the prices decline further.

At this stage, stocks transfer from weak hands to strong hands. The floating stocks of a company would be held by strong hands. So slowly supply stops and demand picks up at a lower price. Now the price difference also plays a crucial role. Since the prices are low now, automatically demand picks up in that stock. At one stage, supply will be overwhelmed by the demand and the prices of the stocks start picking up. This process always takes a time to complete. That is why a cycle is created in the market. This may be of Intraday, or weekly or yearly or decades cycles.

The same process takes place during the bull market peak vice versa to create a cycle. Proper understanding of cycles is very essential for successful investing.

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Will This Growth Sustain forever?

The new Investors and younger generation of India and China feels that the economic growth of their countries are non stopple and the growth is going to be there for ever. May be this growth continue for another decade, but at one stage, any growth has to see a saturation.

Saturation will be followed by the period of negative growth. The economic cycle will always see a high and a bottom. May be the growth and slow growth time periods may differ, but that will happen.

After the World War, Japan concentrated more on their economic growth. So Japan attracted lot of foreign investments from all over the world and the Japanese invested in all countries. The growth was phenomenol since 1950 to 1990. Their Stock Markets peaked in 1989 when Nikkei was trading around 39000.

Since then, for the past 20 years, Nikkei crossed its all time high of 39000. Now it is trading around 10000. It is one fourth of its all time high of 39000. So, a generation on Investors has never seen the peak in Japan.

The same will happen to India or China in the future. People has to learn lessons from Japan.