Posted By Darren Winters on Jul 21, 2022


In the age of central banks, perhaps there are two cycles investors should keep on their radar; the psychology of the market cycle and central bank liquidity cycle.

If investors can pinpoint where the market is in these two cycles, it could help them optimize entry and exit points

Let’s zero in on the psychology of market cycles with a price on the vertical axis and time on the horizontal axis.

The first phase of market psychology is disbelief, the rally will fail like the other. Price action is typically choppy in the disbelief phase, rising with hope only to come crashing down again.

Hope comes next in the psychology of market cycles. A clear upward trend in prices is visible as prices climb an escalator. Investors believe the rally is real.

Optimism gives way to belief with investors going all in.

Price action is rock climbing in the belief stage of the psychological market cycles


As prices keep climbing, thrill is the next phase of the cycle.

Investors decide to borrow using margins to fund their position because they are so confident that prices will keep going higher. Investors also want to tell everyone about the investment.

Finally, peak optimism in the psychology of market cycles is Euroria, known as irrational exuberance. In this stage of the cycle investors think they are geniuses, that they all get rich. Price action is like an elevator moving vertically higher.

So that is the first half of the psychological market cycle, a trend of rising prices where investors’ sentiment improves, starting with disbelief, hope, optimism, and thrill.

The buy low sell high maxim of investing suggests buy in disbelief and sell in the thrill stage of the psychology of market cycles

The second half of the psychology of the market cycle indicates declining prices.

Market peaks with euphoria and then descend with complacency, where investors believe they need to cool off for the next rally. Price action is again choppy. Then there is a breakout in prices to the steep downside. Anxiety is the next stage in the cycle. Prices are now taking an elevator down. Investors are surprised they are getting margin calls as the dip is steeper and longer than expected. The capitulation phase comes in panic, and the elevator down continues. Investors think shit everyone is selling. They think they need to get out. The feeling of Anger is strong. People blame the shorters, the government, and the regulators. Price action flattens into a depression, and investors feel remorse and stupidity. The price starts ticking upwards to disbelief, the beginning of the cycle.

The psychology of the market cycles mirrors central bank liquidity cycles from tightening to easing

So peak tightening is associated with the depression phase of the market psychology cycle. In other words, it is where the smart money buys low-risk assets at price support. At the early bullish stage of the risk, cycle prices rise for risk assets and fall for safe-haven assets.

Alternatively, peak easing, the thrill cycle of investor psychology, represents the peak price for risk assets. It is where investors should sell risk assets at the top and buy safe-haven assets at the tough.

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