I’ve talked before about The 4 Stages of the Stock Cycle…
And why you only want to own stocks during Stage 2 – the accumulation stage.
If you want to make money in stocks, this is when you need to own them.
But just as important as waiting for a confirmed Stage 2 uptrend to buy is learning to sell in Stage 3 – the distribution stage.
By this time, the big boys have made their money and are now selling to book profits.
Let’s take a look at Global Payments Inc. (GPN) for an example…
Stage 1: Consolidation
During the initial stage, the stock is not drawing any attention to itself.
It can lay dormant for months or even years with no major moves in either direction.
No one is talking about the stock, and it is completely off the radar of most investors.
Global Payments Inc. stock spent years consolidating in Stage 1 before emerging in late 2013.
Stage 2: Accumulation
Stage 2 delivered handsome returns to investors with minimal pullbacks as shares advance over 400%.
This is where I want to own the stock.
I’m not trying to buy the low or sell the high. All I want is a quick gain from the meat of that trend.
But all good things come to an end… Eventually, institutions decide to sell.
They’ve held for a large gain, and it’s time to book a profit.
This selling will bring an end to Stage 2 and the beginning of Stage 3.
Stage 3: Distribution
Stage 3 can be difficult to spot early. But doing so is crucial to keep your hard-earned gains.
Stage 3 can be difficult to spot early. But doing so is crucial to keep your hard-earned gains.
Luckily for us, institutions cannot hide their actions. Their colossal size works against them and makes the selling easier to spot.
I look for two things to signal the arrival of Stage 3…
First, high volume. And second, big price swings.
Notice the trading volume during this period. It is twice what we saw during the stock’s ascent.
Price action is also very volatile.
Stocks under accumulation should not suffer 49% dips.
If it were still being heavily bought by institutions, price would have been supported.
Stage 3 is dangerous. This is where amateurs get into trouble.
They watch shares soar for months… Now, they finally have a chance to buy on the dip…
Unfortunately, they have arrived late to the party.
The “dip” is heavy institutional selling. They’re buying into weakness, and the results will not be pretty.
The best they can hope for is to get out before Stage 4 sends prices through the floor.
Practice spotting Stage 3 selling. It is crucial to your success as an investor – especially if you hold for the long-term.
Pull up charts of Zoom Video Communications, Inc. (ZM) and Peloton Interactive, Inc. (PTON).
Do you see where swings started getting wild last October?
(Notice the depth of the pullbacks.)
So, study these charts.
And next time you see this Stage 3 action, you’ll know it is time to sell.
Stage 4: Capitulation
Of course, you should be out of the stock by Stage 4, the final capitulation phase.
By now, there is no one left buying the stock. Volatility increases as investors rush to liquidate their positions.
Near the bottom, margin calls are triggered forcing the final wave of selling.
Eventually, the stock becomes undervalued and institutions begin buying again.
Stage 1 can now begin again, and the process starts all over.
Embrace the Surge,
Ross Givens
Editor, Stock Surge Daily
