One of the key concepts taught by Mark Minervini in his first book, Trade Like a Stock Market Wizard, is the concept of the lifecycle of a stock. He talks about how all super performance stocks move in stages. The following are the four stages of a stock’s lifecycle:
Stage 1 = Neglect Stage
Stage 2 = Advancing Stage
Stage 3 = Topping Stage
Stage 4 = Declining Stage
Minervini’s trading methodology focuses on latching on to key market leaders before they make their rapid price advance, he wants to make the most amount of money in the least amount of time. This is why he focuses on stocks that are in Stage 2 uptrends. Minervini likes to trade stocks that are making new highs and breaking out of sound consolidations; he prefers to trade with “the wind on his back.” He uses a base counting strategy which helps you identify where the stock is in its Stage 2 uptrend. To learn more about base counting check out this article: Base Counting: Identify the Lifespan of Today’s Leading Stocks
Now let’s go through all the stages a stock will go through. Many may be wondering, “Why not just buy a stock that is at Stage 1 and just wait for it to go up?” The problem with this, unless you’re a value investor, is the opportunity cost. No one will ever know when a stock will come out of the Neglect Stage, it may take months or even years for it to make its first run-up. During the time you spent waiting for your laggard stock in Stage 1 to go higher, there are countless stocks, especially if we’re in the right environment, that are making new highs in Stage 2 uptrends.
Now to the stage you should focus on, the Advancing Stage. This is the stage where stocks make their biggest moves, and the stage you will not want to miss out on. Stocks can double, triple, quadruple, and possibly much more over a certain period of time, especially if we’re in a proverbial bull market. You want to always keep an eye on stocks breaking out from early-stage bases after an initial run-up and stocks making new 52-week or all-time highs on massive volume. This is where money is made.
The third stage is the Topping Stage. In this stage stocks start to enter late stage bases, maybe a 4th or 5th base. In Stage 3, this is when it’s obvious that the stock is a super performer in the market and everyone, including your barber, wants to get their hands on it. At this point, the smart money who bought during the early bases are already selling into strength as more retail traders get their hands on the stock. Distribution starts to take place and the price action becomes much more choppier while the stock is in a wider range than the previous consolidations.
The final stage is the Declining Stage. Stocks in Stage 4 are those we want to avoid at all costs. Yes, there are opportunities for counter-rally or bounce plays, but if we’re in a bull market why try to force the issue on low probability plays? We want to trade with the trend; as the proverbial saying goes, “The trend is your friend!” As the stock declines it will continue to make a pattern of lower highs and lower lows, while there are some investors who bought at or near the top still holding on to their big losses. If you didn’t sell during the Topping Stage, you will definitely need to sell here.
Below are a few examples of stocks that went through stages 1-4:
As we’ve just experienced one of the strongest market crashes in the history of, not only our local, but the global markets as well, let’s use this time to learn how to take advantage of the opportunities that will come in the next bull market. Whenever the market has finally confirmed a bottom, you will see stocks coming out from Stage 1 entering on to Stage 2, these names may likely be the next market leaders of the next cycle.
