The Stock Market Cycle
by John Train from The Craft of Investing
J. P. Morgan was once asked what he thought the market was going to do. He replied in his usual portentous style, "It will fluctuate." Although this seems like a putoff, it is in fact one of the most important possible truths. You need to get deeply into your bones the sense that any market, and certainly the stock market, moves in cycles, so that you will infallibly get wonderful bargains every few years, and have a chance to sell again at ridiculously high prices a few years later. If you grasp just that one principle, you have learned something that will let you prosper if you don't become too paralyzed to act.
The stock market is a voting machine, polling investors on the future, not the present. Differently put, it is a barometer, not a thermometer. It looks ahead. In a ship, the worse the storm and the sicker the passengers, the sooner things will improve and the barometer start rising. Thus, the greatest rise in stock market history, when the Dow Jones Average doubled in less than three months, was in the summer of 1932, in the midst of a financial hurricane. Similarly, once the weather is perfect it can't get better, so the next change in the barometer will probably be down.
The first sense you have to acquire, then, is that the worse you feel, usually because the news is bad, the safer the market is; and the better you feel, usually because the news is good, the closer you are to a top.
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