The Sentiment Cycle: Studying the behaviour of market participants

Malcolm Melville

Malcolm Melville

Wealth Preservation Manager

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Out of fashion

  • Asset movements: Asset prices have fallen rapidly but the pace of the decline starts to moderate.
  • Characteristics: News coverage is broadly negative, but at the end of this stage prices begin to rebound from very depressed levels.

Early adoption

  • Asset movement: Asset prices move higher.
  • Characteristics: There is very little media coverage. Some investors start buying, but the fundamental reason for the new trend is not recognised by most.


  • Asset movement: Asset prices start to trend strongly.
  • Characteristics: Significantly more investors buy the asset, in particular retail investors, and the fundamental reasons for buying appear obvious.

New paradigm

  • Asset movements: Asset price appreciation continues and can accelerate.
  • Characteristics: The bull market is well established, investment returns are good, and investors begin selling other assets to fund the purchase of this new asset. This stage can last a considerable period.

Blind faith

  • Asset movements: Asset prices grind to new highs but with limited momentum and then start to decline.
  • Characteristics: Asset prices start to fall moderately but investors don’t acknowledge the decline. They have total faith in the asset class. Press coverage is minimal because the price movements can’t be explained.


  • Asset movements: Falling asset prices force investors to take note
  • Characteristics: The change in the asset is noted but the “good reasons” to hold the asset are still in place. New investment stops and some selling may occur.


  • Asset movements: Asset prices continue to fall.
  • Characteristics: The rational behind the fall becomes evident and accepted. Withdrawals begin and long term viability of the asset class is questioned.


  • Asset movements: Asset prices fall further and rapidly.
  • Characteristics: Substantial losses occur, everyone ‘understands’ what is happening, and the long term outlook for the asset are perceived to have changed for good.

After capitulation the sentiment cycle is complete and an asset enters "out of fashion".