The 4 Phase Lifecycle of a Stock
Like living organisms and processes in nature, stockmarkets and individual companies and their stocks go through processes of birth, growth, maturity, decline and death or rebirth. This becomes readily apparent when one looks at the long-term charts of stockmarkets and the long-term charts of the stocks of many individual companies. A knowledge of these cycles is of immense value in stock trading and investing, for if you know what time it is on the "market clock," either for entire markets or individual stocks, or both, you have a pretty good idea and overview of the big picture and are much less likely to be taken in or thrown by moves which run counter to the larger underlying trend. This is why it is worth pinpointing as exactly as possible where a stock is in the 4-stage cycle described below. Note that the graphic depicts the idealized lifecycle of a stock - birth, growth, maturity, decline and death or rebirth. In the real world it is not always easy to determine exactly where a stock is in its lifecycle, however, to whatever extent it is possible, it is always well worth the effort.
PHASE 1: THE ACCUMULATION OR BASING PHASE: the basing phase occurs either in the early life of a new company, as it "gets its act together" or after a period of prolonged decline in the stock price of an established company as the company reorganises and retrenches following a period of adverse business conditions. This phase normally can last anything from a few months to a year or two and may last many years. Although the stock price may be relatively static throughout the basing phase, the technical condition of the stock is steadily changing until, at the end of the basing phase, the stock is largely held by owners who have no intention of selling until they realize a substantial profit. Frequently, a well defined resistance level develops at the top of the base area, so it is usually clear when a breakout from the base area to enter Phase 2 has occurred.
PHASE 2: THE GROWTH PHASE: as business conditions for the company start to improve the stock "breaks out" of its long base, on increasing volume to enter the growth phase. The uptrend becomes self-reinforcing, as the majority of existing stock holders are unwilling to sell a rising asset and new investors must bid up the price to obtain stock. The continuing rise is fuelled by steadily improving business conditions for the company. Thoughout Phase 2 the price of the stock runs ahead of its 200-day moving average, any approaches to which presenting buying opportunities, and are frequently a good point at which to buy call options.
PHASE 3: THE TOP OR DISTRIBUTION PHASE: this is the phase during which astute stock owners, aware that the good times cannot carry on indefinitely and that the stock is overvalued, distribute their holdings to less discerning investors, under the cover of good economic news and rosy earnings figures etc. There is normally plenty of time to get out, the top area usually ranges from several months to a year or two in duration. Early warning that the good times are over and that a top may be beginning to form is provided by the price breaking below the 200-day moving average, as it refuses to advance further and moves sideways into the top area trading range.
PHASE 4: THE DECLINING PHASE: a stock will normally enter the declining phase without the reason or reasons being readily apparent, but as the decline continues more and more bad news and evidence of deterioration surfaces driving the price lower and lower. There are usually one or more "false dawns" on the way down, when the market wrongly assumes that the worst is over and that the price has bottomed, but generally, the reverse dynamic exists to that which was in effect on the way up in phase B: investors being unwilling to buy a falling asset. Approaches towards the falling 200-day moving average provide shorting opportunities, and are good times to buy put options.
On www.clivemaund our efforts are directed towards finding and capitalising on stocks which are late in Phase 1 or early in Phase 2, as stocks in this stage of the overall cycle clearly offer the greatest potential for safe and substantial capital appreciation. The reason that the Oil and Precious Metals sectors are the focus of the website is that many stocks in these sectors are clearly in Phase 2 uptrends. Some are midway through Phase 2 advances, while others are early in Phase 2 or very late in Phase 1 - the ideal point at which to buy. This all sounds great in theory, but how does it work out in practice?
Some real-life examples illustrating the theory in action are presented now in the form of links back to the original recommendations, where Avino Silver and Gold ASM.V, Coeur d'Alene CDE, ECU Silver ECU.V, New Guinea Gold NGG.V, Polymet Mining POM.V and Silvercrest Mines SVL.V were actually bought very late in Phase 1, in the case of Silvercrest one day before the breakout to commence Phase 2 occurred, and Taseko Mines was bought early in Phase 2.
Most investors are news driven, that is, they need solid fundamental evidence that the outlook for a company is good before they buy a stock. The problem with this approach is when they have the needed evidence, so has everybody else and it's already in the price. I get Emails from people almost on a daily basis asking me to look at such-and-such a stock, which has very often already risen by 400 - 600%, and it is thus clear that the market has already discounted the good news or outlook. The time to buy a stock is when the news is almost universally bad, for the simple reason that this is time that nobody wants it, and the weak hands, responding to the bad news, will be tossing it overboard, often for a large loss. The time to sell is when the news is rosy, which is almost always the case after a major uptrend. The public needs good news to buy, and the financial media, who are the servants of Smart Money, are only too willing to oblige with glowing reports and wonderful stats. The average investor sucks it up like a vacuum cleaner, and rushes into the market to pay top dollar, and, as in that saying "marry in haste, repent at leisure" has plenty of time to regret it later.
Some years back there was an election campaign slogan in the US that went "Keep it simple, stupid!" Nowhere is this more true than in the stockmarket, where traders and investors are daily assaulted by a tidal wave of information, both fundamental and technical, at least 99% of which is irrelevant, and to the extent that it has the power to waste time it is actually a handicap. You could lose a lot of sleep and easily go crazy if you don't learn how to handle this stuff. One of the biggest challenges facing investors, especially newbies, is learning to "sort the wheat from the chaff" - to sift out what is relevant and significant. This is something that takes time and experience and there are no shortcuts. Thus, although some may consider the 4-phase cycle presented here as crude and simplistic, it has practical application and is effective and does not involve much time input, and that's what matters.
Some may wonder why I am not concerned about giving away the "tricks of the trade" by posting an article such as this on public websites, since it may encourage more people to buy low and sell high. The answer is that there is no force on earth, except perhaps a communist shutdown of the markets, powerful enough to stop the average investor from buying at the top and selling at the bottom. Nothing that has been published to date has succeeded in deflecting the public from its insatiable desire to buy at the top and sell at the bottom, and quite probably nothing ever will, because the masses are, by definition, sheep - if they weren't they couldn't be fleeced, could they?
This article will only be read by a small percentage of those engaged in trading stocks in these sectors, and, except for the few who have the presence of mind to save it, or make an effort to remember the 4-phase cycle, it will soon will be buried by layers of later contributions from other writers, and thus largely forgotten. Only those who deserve to add the information presented here to their arsenal of trading techniques will have this information at their disposal in the future.
I have known about the 4 Phase lifecycle of a stock for years, but did not recall where I picked up the idea, but have used it to great effect ever since. A subscriber has advised me that it first appeared in a market publication back in the 80's called "The Professional Tape Reader" written by Stan Weinstein. Thanks Dan.
is an English technical analyst, holding a diploma from the Society
of Technical Analysts, Cambridge, England. He lives in Chile.
Copyright ©2003-2011 CliveMaund. All Rights Reserved.
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