I’ve talked about the Four Stages of the Stock Cycle before…
Unfortunately, this is something that most people are never taught before they start trading.
But understanding the stock cycle can save you more money in the stock market than anything else you’ll ever do.
If you’re a regular reader, this topic is worth brushing up on. And if you’re a new reader, then today’s your lucky day.
In the next few minutes, I’m going to open your eyes to how the market really works…
The Four Stages of the Stock Cycle
Take a look at the weekly chart of Roku, Inc. (ROKU) below, which I posted to my TradingView page a while back.
This is a perfect example of the four stages that every growth stock goes through.
In fact, they often repeat this cycle over and over again throughout the years.
It doesn’t matter if it’s a mega-cap stock like Amazon.com, Inc. (AMZN) or a much smaller growth stock like Crocs, Inc. (CROX), they all follow the same cycle over varying timeframes…
But knowing where a stock is in its cycle will greatly improve your odds of success when it comes to trading it.
Stage 1: Accumulation
During the accumulation stage institutional investors begin building large positions in a stock.
This is when a stock doesn’t really go anywhere and is just chopping around.
It might be a value stock but there’s really nothing too exciting going on.
Stage 2: Markup
Stage 2 is where things start to get interesting… It is the only place in the stock cycle that I’m interested in owning the stock!
This is where a company comes out with an exciting new product or maybe the company’s sales start to really surge.
During the markup stage, a stock will break out on increased volume as large buyers start to really flood in.
Investors who are following the trend and the bullish momentum also pile in, which further increases demand for the shares.
Small retracements or pullbacks get bought, which supports the stock price and keeps it elevated.
This is when the stock makes its big move and investors have the opportunity to make a lot of money in a short amount of time.
If you want to make money in stocks, this is when you need to own them.
Stage 3: Distribution
Eventually, a stock will top out and enter Stage 3.
During the distribution stage, institutions start to take all of the profits that they’ve made during Stage 2 off of the table.
If the stock started off undervalued, it is likely fully valued by this stage and no longer in high demand.
Or the company’s sales growth might be starting to slow, so large investors start to unwind their positions.
Whatever the reason, the big players are ready to get out and collect their profits. When they begin selling, that’s the beginning of the end for the stock cycle.
And you’ll know it’s the beginning of the end because the selling will show up on the chart with one or more big, red candlesticks on above-average volume.
Stage 4: Markdown
When a stock gets to Stage 4, the party is over.
When institutions are out and the big players are gone, there’s no one left to prop up the stock.
The only investors still around are the retail traders and individual investors like us.
Folks like us simply don’t have enough buying power to push the stock back up.
And as we take our profits or start to see losses develop (depending on what stage we bought in), the stock continues to fall.
Any rallies eventually get sold into, margin calls are triggered and short sellers put more pressure on the price.
During Stage 4, stocks can lose 90% of their value or more! Just take a look at what happened to Roku over the past two years.
Something for Everyone
Most retail traders prefer to buy stocks and don’t really do too much short selling. If that sounds like you, you should only buy a stock during its Stage 2 uptrend.
Aside from the very peak of the rally, there are very few times during Stage 2 when it’s a bad idea to buy the stock.
But if you are looking to go short, it’s exactly the opposite… You should only short a stock during its Stage 4 downtrend.
There are very few times during Stage 4 when it’s a good idea to buy the stock. Instead, this is where you should look for short ideas as the stock declines.
I teach this strategy in my premium research service, Stealth Trades. I help retail traders and individual investors find upside opportunities in Stage 2 stocks and downside plays in Stage 4 stocks.
There’s really something for everyone…
Embrace the surge,
Editor, Stock Surge Daily