How Human Emotions Drive Markets—And How You Can Stay Ahead
The moves in markets and the economy are cyclical. Sometimes cycles boom, other times they bust. The question remains – what is driving the fluctuations? It is not always about numbers and technical indicators, but about human behavior. To navigate these volatile market fluctuations, the understanding of emotional factors behind market cycles is essential.
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Why Do Cycles Happen?
Excesses and corrections lie at the heart of every cycle. The bubble emerges when markets or economies expand excessively. Consequently, the bubble bursts, leading to a downturn or short-term correction. Why does growth fail to remain steady?
Consider the economy of the United States. For example, it increases by an average of 2% annually. Nevertheless, the economy experiences fluctuations in growth, with rates varying from 3% in some years to 1% in others, and occasionally even experiencing negative growth during recessions. On average, the stock market saw a yearly growth rate of approximately 10% over the last 90 years. However, returns in a specific year usually don’t hit 10% directly. Instead, they tend to vary significantly, either increasing dramatically or falling sharply.
What causes this inconsistency? Human emotions like optimism, fear, greed, and risk-taking.
Markets aren’t just mechanical systems—they’re driven by people, and people are unpredictable. When emotions take over, cycles form.
You don’t want to buy when there is euphoria in the market
How Cycles Play Out in the Economy
Here’s a simple example: When companies expect strong demand, they expand—building new factories, hiring more workers, and producing more goods. If many companies do this simultaneously, the economy grows faster than usual, creating an upcycle. But eventually, too much capacity gets built, leading to a correction. Factories close, layoffs begin, and the economy slows, often in recession.
How Cycles Work in Financial Markets
Financial markets behave the same way. When investors are optimistic, stock prices rise—sometimes much faster than the actual growth of companies. Take the 1990s, when stocks in the S&P 500 grew by 20% annually, even though the companies themselves weren’t growing nearly as fast. This creates excesses, and eventually, a correction must occur. Booms are followed by busts, and bull markets are followed by bear markets.
90’s were crazy times in the stock market
The Recurring Themes That Drive Bull Markets
Every market cycle is different, but certain themes tend to repeat during bull markets. Recognizing these themes can help you spot when a market is nearing a peak:
“Fear when others are greedy” – Warren Buffet
- Excessive optimism: Overly optimistic investors pay higher prices for assets than their actual value when they become overly excited. This positive outlook causes prices to rise higher than supported by the fundamentals, resulting in bubbles that eventually pop.
- Low Risk Aversion: Typically, investors are careful and seek a safety cushion. However, in a market that is on the rise, individuals tend to worry less about risk. Investors begin taking more risky bets as they succumb to the fear of missing out (FOMO).
- Excessive Capital: In bullish markets, there is frequently a surplus of funds seeking limited investment options. When an excessive amount of capital enters the market, prices go up rapidly while returns decrease. This indicates that a correction could be on the horizon.
The Usual Market Cycle
This is typically how a market cycle progresses:
Most of the people miss the Expansion stage
- The Beginning (Expansion): After a period of poor performance, fundamentals start to improve. Company earnings rise, good news dominates, and investors grow optimistic. Capital becomes easier to access, and asset prices start climbing.
- The Peak: Optimism turns into euphoria. Investors forget about risk, and prices soar to unsustainable levels. Everyone wants to buy, pushing the market to its peak.
- The Correction (Contraction): The fundamentals weaken, and bad news begins to emerge. Prices start to fall, and fear takes over. Investors rush to sell, and risk aversion returns.
- The Bottom (Trough): At the lowest point, prices are extremely cheap, and risk is low—but most investors are too fearful to buy. This is when the next cycle is about to begin.
SUI/USDT Excitement
$SUI has gained lots of excessive excitement in crypto markets and in the past month took a 7th place on the CoinMarketCap ranking. Some of the crypto analysts started speculating blindly and comparing SUI with Solana surge in 2023. The major leg-up started at the beginning of September this year and hit ~2.35 USD per token in the mid of October resulting in over 200% of price change. As after every extreme price change, the correction appeared leading to over 25% of price correction from the peak.
Tremendous price surge of $SUI
Keep up with the market to stay ahead
Understanding these cycles and identifying market peaks or bottoms is crucial for successful investing. Human emotions, such as hope and anxiety, remain constant, hence cycles will always be present. A savvy investor can recognize signals of overabundance and adjustment and respond appropriately.
That is precisely our main focus in our newsletter. We monitor market cycles, particularly in the realm of cryptocurrency, and assist in pinpointing critical transition points to keep you ahead of major developments.
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