Stocks move from under valuation, to fair value and then to over valuation in a cyclical way.  The reasons why markets swing in this way is bound up with the herd psychology of the market crowd.

The process begins with the stock being out of favour in the market.  It usually represents good value at this time, but past or current troubles make investor wary.  There is often only bad news being published about the stock and no broker is recommending purchase.  However, some professional investors will discern the value and begin patiently accumulating a position.  Their buying is primarily from the public, who have eventually lost hope of the stock coming good and resign themselves to their losses and sell.

Eventually, the public selling lessens and prospects begin to improve for the stock.  The price begins to rise in the up trending phase.  The professionals continue buying, again from the public who see the increase in price as an opportunity to get out at less of a loss.  At the same time, other professionals begin to buy, because of the fear of missing out in the performance stakes.

Brokers have not yet begun to recommend the stock to the public.  Some good news stories appear, but are generally discounted.

As the up trending phased continues, the professionals complete their buying.  The stock probably now represents fair value.  Brokers at last begin to recommend the stock to private clients on the basis of good earnings reports from the company.

It now enter the last stage of the up trending phase as the public becomes more and more interested in the stock.  Brokers upgrade the stock and the public buying becomes ever more frenzied.  Everyone is talking about the stock.  It is now overvalued and professionals are quietly selling into the public demand.

The end may be gradual, or a sharp peak may develop in cases where euphoria about the company prospects has got right out of hand and unexpectedly bad news will break the spell.

Eventually, the last public buyer has bought and the price must fall.  Some bad news may emerge and Brokers downgrade the stock as a hold.

This is where the cycle of buying and selling stocks repeat again.  If you have been investing for more than 10 years, you'll be familiar with this vicious cycle.

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