Stock Life Cycle – Different Phases
You must understand the stock life cycle for interpreting the performance of a fund. Everything in nature goes through a cycle whether it is a living organism or weather. Like the same way, the stock market also follows a cycle. After a bear phase, there will be a bullish phase but no one knows how much time it’s going to take.
By looking at long-term charts, we can clearly observe the life cycle of the stocks. As a trader, you should know the cycle is very important. It may help you in identifying where a stock is in its lifecycle.
Different phases of the Stock Life Cycle
Phase 1: Accumulation Phase
We can observe this phase either in the early life of a new company or after a prolonged decline in the stock price of the established company. After a period of an adverse business condition, the company tries to reorganize during this period. This period may last from a few months to many years. The stock here is largely held by the owners who don’t have any intention of selling until they realize a substantial profit.
The stock may move in a range during this period and a strong resistance develops at the top of the base area. Any breakout from the base area signals the stock has entered the second phase.
Phase 2: Growth Phase
After the improvement in the business condition of the company, the stock often breaks out of the long base and enters the growth phase on increasing volume. With the steady improvement in the business conditions and the entry of new investors who bid up the price to obtain stock reinforces the uptrend.
Phase 3: Distribution Phase
There are chances of the stock becomes highly overvalued and this phase clearly indicates that. this stock is often distributed to small investors. The top may range from several months to a few years and the price may move sideways during this period. An early warning sign can be in the form of price breaking below its 200 days moving average.
Phase 4: Declining Phase
There are no evident reasons for the stock to be in declined phase at first. Gradually the bad news and evidence of determination will lead the price to further lower levels. . In between the fall, there may be some short-term false up-move. The investors may think that the price has bottomed out. We should be careful during this period. When the stock price approaches to its 200 DMA, it may provide good shorting opportunity. Every up move in the stock is looked as an opportunity to exit from it. This leads to the formation of downtrends. The downtrend lasts for a short span of time compared to the uptrend.
The downtrend eventually stops as value investors again enter into the stock at lower levels. This gives birth to a fresh cycle for the stock and the process resumes from stage 1.