According to general wisdom, there are these few types of phases in terms of psychology in markets.
This gives the understanding of human behavior/psychology with regard to movements of markets.
Below are the so called phases and their brief explanation,
1. Optimism
2. Excitement
3. Thrill
4. Euphoria
5. Anxiety
6. Denial
7. Fear
8. Desperation
9. Panic
10. Capitulation
11. Despondency
12. Depression
13. Hope
14. Relief
15. Optimism
The markets, generally after a bear phase, wants to rise, big boys have swept stocks at dirt cheap prices and the general investors sentiment is gaining positiveness by recovering economic data. This phase is called optimism phase when the seeds of possible new cycle of market rise is sown.
This gradually turns into excitement with jumps in the market and few early bird IPOs hitting and making investors big in markets. This excites the existing players in markets and seduces the outsiders to think about joining the party without missing. This is called excitement phase.
The excitement usually turns into thrill as the ‘tips’ and rumour market gets hotter day by day. Every one long is generally making money. The atmosphere has turned into thrill from merely excitement. The IPO market is booming with companies of all sorts of businesses coming with issues having insane prices.
The thrill did have some logics in some aspects and pockets, which was only waiting to be overcome by a complete blindness rally and bull run usually taking the form of Euphoria in markets. the only and only thing markets and stocks are driven are news in particular and news in general. No negative news whatsoever is available. If there are any, not broadcasted, or not thought to be necessary to be broadcasted by the blue biz channels. Exorbitant and insane price targets for benchmark indices are being given by so called market maestros who know that market is about to peak and they should consider dumping now!
The market starts feeling jerks of downside due to some macro, generally of international nature phenomena. However the markets recover. But does not sustain and jerks down again. The losses born by those who didn’t knew that stock prices also do go down, spreads feeling of anxiety amongst the small and medium sized participants. The brokers also have started cutting on exposures and making margin calls due to wide swings.
The denial phase follows, which signifies the rejection of market participation to accept that market is more volatile now, and the news flow is not all ‘rosy’, and something fundamentally is being rottening. Many average out their losing positions. More margin calls trigger. The intermediaries become vigilant at this stage and the later stage of FEAR which causes many stocks plunge only due to such type of margin/exposure etc technalities. The unability to cope with denial phase and building up of full capacity hedging positions by big boys causes pressure on market.
The FEAR converts into desperation when investors know markets are going lower, but still holds on to ‘wait’ for recovery. They become desperate. The intelligent boys have already sold off. The markets are probability 20% odd off its highs. Bad news to good news ration is continually getting in favour of the short sellers.
The rising height of feeling of desperation, at one point, results into a panic. This panic stage/feeling can be compared to euphoria stage of selling. Like in euphoria stage stocks are bought more or less without logic, opposite is done in panic stage. Everybody wants to get out as soon as possible. Every single negative news is started being given excessive importance. Some couple of macro-type factors are made the prime-reason for the crashes. This is a stage where the beginning of opportunity for value hunters starts ariisng.
Investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling. The term is a derived from a military term which refers to surrender. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom. At this stage many investors who clinged to hope since the denial stage, becomes determinalt of teir losses, and decided to forget the stock markets. Loss averse investors decides to not to watch the markets, and maintain status quo.
The next stage, Despondence is defined as, depression of spirits from loss of hope, confidence, or courage; dejection. In the former stage the investors have surrendered to market being in the bear phase and that they could not do any thing. The later stage of despondency is an outcome of the former stage.
After all these, depression or recession prevails in the form of slowed economic growth rate and government intervention to boost the economy. Credit contraction also happens many times. This phase sees a whole lot of a turn of economic cycles in many countries. The markets are generally range bound without much volatility.
Then returns the phase from where all started. Hope. The talks of markets bottoming out have been heightened. And steam of concensus regarding markets bottoming out and economic recovery on track is being gathered.
Then comes relief in terms of good real economic data, few surges in markets and return of volume usually by 20-30% rise in volumes prevailing during despondency and depression stage. This sort of relief brings optimism in markets. The difference between hope and optimism is that hope is partial; it is generally not wide spread feeling amongst all the market participant while optimism is conceived, cherished, and popularized by most of the market participants. It also constitutes actual spurts in the market in terms of price rises.
Please note that this is generalization and the market movement does not always follow this pattern of psychology. However this type of caricature gives a good perspective to look at market in behavioural fashion.
