What Is A Cycle

The dictionary definition of a cycle is that it is "an interval or space of time in which is completed one round of events or phenomena that recur regularly and in the same sequence." In the market, we consider a classic cycle exists when the price starts low, rises smoothly to a high over a length of time, and then smoothly falls back to the original price over the same length of time. The time required to complete the cycle is called the period of the cycle or the cycle length.

Cycles certainly exist in the market. Many times they are justified on the basis of fundamental considerations. The clearest is the seasonal change for agricultural prices (lowest at harvest), or the decline in real estate prices in the winter. Television analysts are always talking about the rate of inflation being "seasonally adjusted" by the government. Rut the seasonal is a specific case of the cycle, always being 12 months. Other fundamentals-related cycles can originate from the 18-month cattle-breeding cycle or the mont hly cold-storage report on pork bellies.

Business cycles are not as clear, but they exist. Business cycles vary with interest rates. The government sets objectives for economic growth based on its ability to hold inflation to reasonable levels. This growt h is increased or decreased by adding or withdrawing funds from the economy and by changing the rate at which government lends money to banks. Rasing of rates encourages business; tightening of rates inhibits it. Inevitably this process alternates, causing what we see as a business cycle. Although in practice this cycle may repeat in the same number of years, the exact repetition of the period is not necessary. The business cycle is limited on the upside by the amount of growth the government will allow (usually 3%) and on the downside by moderate negative growth (about -1%), which indicates a recession. The range of the cycle from +3% to -1% is called its amplitude.

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