Markets don’t move only on earnings or liquidity—they swing with investor emotions. Recognising the pattern (euphoria → panic → despondency → hope) helps you keep SIPs running, rebalance on time, and avoid buying high or selling low. That’s the real edge in long-term wealth building.
What do we mean by a “market cycle”?
A market cycle is the journey from a rising market (bull) to a falling one (bear) and back again. Prices often move ahead of the economy because sentiment and stories amplify fundamentals.
- Accumulation: Pessimism eases; informed buyers return.
- Advancing/Participation: Earnings and credit growth look better; breadth improves.
- Distribution: Optimism turns into speculation; risk feels “cheap.”
- Decline/Capitulation: Fear overwhelms; good assets get sold with the bad.
In India, you see this in Nifty 50 vs Mid/Smallcap leadership shifts, FII/DII flow reversals, and IPO windows opening or shutting.
Why emotions move prices more than spreadsheets
- Loss aversion: Losses hurt roughly twice as much as similar gains. We hold losers and sell winners too early.
- Herding: WhatsApp groups and headlines spread “what’s working,” compressing risk premiums late in the cycle.
- Overconfidence & leverage: After easy gains, investors add margin/F&O exposure just when risk is rising.
- Myopic loss aversion: Checking portfolios daily invites knee-jerk decisions.
Emotions cause overshoots—too high in booms, too low in busts.
The emotional curve (and the usual mistakes)
- Optimism → Excitement → Thrill → Euphoria (peak risk)
“This time is different.” → Chasing hot smallcaps/IPO lists; ignoring valuation and quality. - Anxiety → Denial → Panic → Capitulation (best forward returns)
“It’s over.” → Exiting after big drawdowns; pausing SIPs at exactly the wrong time. - Despondency → Hope → Relief → back to Optimism (new cycle)
Re-entry happens late; performance chasing restarts.
Use the infographic above to remember: Euphoria = highest risk. Despondency = best future opportunity.
Biases to watch—and simple fixes
- Recency bias (assuming the last 12 months will repeat)
→ Keep a 5–10 year base-rate view for earnings, P/E and margins. - Confirmation bias (hunting for agreeable news)
→ Maintain a written Investment Policy Statement (IPS) with a “what could prove me wrong?” checklist. - Anchoring (stuck on the previous high/issue price)
→ Focus on forward cash flows, ROCE, competitive position, not old prices. - Disposition effect (selling winners, nursing losers)
→ Rebalance on schedule; use partial profit-taking into pre-set bands. - Overconfidence (bull markets masquerade as skill)
→ Respect position limits, diversify, and track risk-adjusted returns, not just raw CAGR.
A little math that changes behaviour
- Recovery math:
If you fall L%, the gain needed to break even is L / (1 − L).
A 50% drawdown needs 100% to recover—avoiding deep losses matters. - CAGR:
CAGR=(EndingBeginning)1/n−1\text{CAGR}=\left(\frac{\text{Ending}}{\text{Beginning}}\right)^{1/n}-1
One-year returns lie; CAGR tells the compounding truth.
- Sharpe (simple):
Sharpe=Rp−Rfσp\text{Sharpe}=\frac{R_p-R_f}{\sigma_p}
Chasing volatile pockets without regard to σ usually lowers long-run outcomes.
- SIP mechanics:
SIPs buy more units when prices are low. In fear-heavy phases, this quietly improves average cost.
What to monitor in India (for context, not crystal balls)
- Valuation backdrop: Nifty P/E & P/B vs 10-year averages; sector concentration risks.
- Market breadth: % of stocks above 200-DMA, new highs/lows.
- Flows: MF SIP totals, FII/DII monthly net flows, IPO/Offer-for-Sale intensity.
- Volatility & positioning: India VIX, Put/Call Ratio, futures OI build-ups.
- Macro setting: RBI stance, inflation path, credit growth, government capex cues.
These are risk thermometers, not “buy/sell” signals.
A practical action plan
- Write your IPS. Objectives, horizon, risk tolerance, and “do-not-do” rules (e.g., no leveraged F&O for long-term goals).
- Define allocation ranges. Example: Equity 60% ±5%, Debt 35% ±5%, Gold 5% ±2%.
Rebalance semi-annually or when a band is breached—pick one rule and keep it. - Automate cashflows. SIP in equity funds, STP from liquid funds for staggered deployment; SWP for retirement income.
- Diversify by design. Tilt to quality balance sheets and cash-generators; use limits on smallcaps/sector exposure.
- Build behavioural guardrails. The 24-hour rule before big changes; a premortem on every new theme.
- Protect the base. 6–12 months emergency fund, term insurance, and health insurance—so you don’t sell at the bottom.
- Be tax-aware. Consider LTCG/STCG; use fresh inflows to rebalance tax-efficiently.
- Get a second pair of eyes. A SEBI-registered advisor keeps the process honest when emotions run hot.
Short India caselets (how cycles feel on the ground)
- 2020–2021 rebound: Investors who kept SIPs and rebalanced from debt to equity during the pandemic decline benefited from lower average costs—despite scary headlines.
- Smallcap surges and air-pockets: Late-cycle microcap euphoria looks genius—until liquidity dries up. A strict allocation cap (say, 10–15% in small/microcaps) prevents portfolio damage.
- IPO waves: When enthusiasm peaks, even weak listings are oversubscribed. Focus on promoter quality, use of proceeds, and valuation, not grey-market chatter.
FAQs
Can sentiment alone time markets?
No. Use it to frame risk, not to predict turning points.
Should I stop SIPs in a bear market?
Generally no. Bear phases are when SIPs add maximum value.
How often should I rebalance?
Either semi-annually or on ±5% bands. Consistency beats clever tweaks.
Are smallcaps always “bad”?
Not at all. They’re higher volatility/lower liquidity—size your allocation to your drawdown tolerance and horizon.
What’s a late-cycle red flag?
Narratives pivot from business quality to price momentum and easy leverage, plus a rush of weak-quality IPOs.
Bottom line
You can’t control the cycle—but you can control your process. When others swing between greed and fear, stick to your asset-allocation bands, keep SIPs running, and rebalance on schedule. For Indian investors, that discipline—layered with RBI/SEBI-aware practices and sensible diversification—turns volatility from enemy to ally.