The concept of stage analysis was first explained by stan weinsten in his book - secrets for profiting in Bull and Bear markets.
I am putting this topic first because most of our upcoming blogs will refer to this concept.
So, what is stage analysis?
Most stock's prices tend to move in 4 stages :
Stage 1- Neglect or consolidation
Stage 2 - Advancing phase or accumulation
Stage 3 - Topping phase or distribution
Stage 4 - Declining phase or capitulation
(Pic courtesy- google)
Stage 1 - Neglect phase or consolidation
Stage 1 - Neglect phase or consolidation
Here, the stock does not do much and is ignored by most institutions as it moves up and down around it's 200 day moving average.
This stage can go on for weeks/months or even years.
If you buy stocks in stage 1, you are missing out on other stocks that are moving up.
Stage 2 - Advancing phase
This is because of 2 reasons:
1. They look at past fundamental data, while the stock price moves on the basis of future fundamental data
2. Institutions need buyers for the shares they sell, so they make their analysts write buy recommendations on these stocks.
Example - future retail.
If you buy stocks in stage 1, you are missing out on other stocks that are moving up.
Stage 2 - Advancing phase
Once a stock's 200 day moving average turns up and it starts making higher highs and higher lows (on weekly charts), it is said to be in a stage 2 uptrend.
While some stage 2's might end really fast and turn out to be false signals, others can go on for years and be real good money making opportunities.
Stage 3 - Distribution or Topping phase
Stage 3 mostly happens after stage 2 and on most occasions shows a head & shoulders or double top or triple top type of a topping pattern on the weekly charts
The moving averages turn flat.
In this stage, institutions are getting rid of the stock
One very important characterstic of stage 3 is that most fundamental analysts and twitter experts will recommend a buy in this stage.
While some stage 2's might end really fast and turn out to be false signals, others can go on for years and be real good money making opportunities.
Stage 3 - Distribution or Topping phase
Stage 3 mostly happens after stage 2 and on most occasions shows a head & shoulders or double top or triple top type of a topping pattern on the weekly charts
The moving averages turn flat.
In this stage, institutions are getting rid of the stock
One very important characterstic of stage 3 is that most fundamental analysts and twitter experts will recommend a buy in this stage.
This is because of 2 reasons:
1. They look at past fundamental data, while the stock price moves on the basis of future fundamental data
2. Institutions need buyers for the shares they sell, so they make their analysts write buy recommendations on these stocks.
Example - future retail.
These were the analyst calls during stock's stage 3 uptrend.
Either something is really flawed in the fundamental analysis that these ivy league MBA's carry out OR
they are just fooling us.
Stage 4 - Capitulation or Downtrend
This is the stage where the stock will mostly remain in a downtrend and most activity will happen below its 200 day moving average
Lets see some more examples :
1. YESBANK (NSE,BSE)
2. HAPPIESTMINDS (NSE,BSE)
4. HIKAL (NSE,BSE)
So, why retailers keep buying at stage 4?
Because,
1. They average down after buying on stage 3
2. It looks cheap.
A few important important things about stage analysis though :
1. Not all stocks will be picture perfect w.r.t various stages.
2. Stages may not always occur in this order, at times a stock directly goes into a stage 4 or a stage 3.
3. At the beginning of a bull market, best stocks will be breaking out of stage 1.
4. During bull market, lots of stocks will be in stage 2.
5. If most stocks are in stage 3, it indicates that the bull market is about to end and bears will soon take control.
6. During a bear market, most stocks will be in stage 4 and the best thing to do is to stay in cash or short.
7. At times, it is hard to differentiate between stages.
After reading through these, you will get a sense of developing a point of view on markets.
In the next blog, we will see: "Technical Analysis vs. Fundamental Analysis: Who Has an Edge?"
1. They average down after buying on stage 3
2. It looks cheap.
A few important important things about stage analysis though :
1. Not all stocks will be picture perfect w.r.t various stages.
2. Stages may not always occur in this order, at times a stock directly goes into a stage 4 or a stage 3.
3. At the beginning of a bull market, best stocks will be breaking out of stage 1.
4. During bull market, lots of stocks will be in stage 2.
5. If most stocks are in stage 3, it indicates that the bull market is about to end and bears will soon take control.
6. During a bear market, most stocks will be in stage 4 and the best thing to do is to stay in cash or short.
7. At times, it is hard to differentiate between stages.
After reading through these, you will get a sense of developing a point of view on markets.
In the next blog, we will see: "Technical Analysis vs. Fundamental Analysis: Who Has an Edge?"