Lesson #1 – The Stock Life Cycle

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Lesson #1 – The Stock Life Cycle

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Just as in life, stocks too have a life cycle. The 4 stages of this life cycle are: Accumulation (or Base), Run-up (or Growth), Distribution (or Top),
Run-down (or Decline). A good knowledge of these cycles is of critical importance in trading and investing, because you will have a much better idea of the big picture and know approximately which stage you are entering a position and its expected direction – making it less likely you will be thrown by short term moves that run counter to the underlying trend.

Accumulation (or Base)
The accumulation stage represents a
slow shift in control as sellers & buyers reach equilibrium in a low
volume, low volatility environment. This phase often lasts the longest and the stock is usually held be investors who have little to no expectation of selling until a profit is realized. There is often a well defined support and resistance level within this base, and so it is clear when a breakout from the base into phase two (run up) occurs.

Run-Up (or Growth)
The run-up or growth period begins when a stock clears the
highs of the accumulation period (its resistance). Here, there is more demand than there is supply of the stock. This uptrend is often self-reinforcing as existing investors see a rising stock and are unwilling to sell, and new buyers are forced to pay higher prices. This in turn creates "momentum". Selling generally only occurs when this momentum has gone, and the price rises enough to convince investors to take profits.

Distribution (or Top)
This phase can often vary in duration. Sometimes a top will only last a very short period of time, such as weeks or months (as we see in the above chart), other times a top can last a long time, such as months or years.

It is at this phase were existing investors realize there is little upside remaining, and because the price has risen dramatically, there is a lack of new buyers coming in, which then leads to the next phase, the run-down.

Run-Down (or Decline)
Stocks can enter this phase for a variety of reasons, such as poor earnings or bad news, or it can simply be a result of having no buyer demand left in a stock that has risen dramatically.

This phase is often characterized by a step and rapid downtrend, which often means existing investors are selling in a panic as there are little buyers holding the price up.

Stocks will go through the above phases many times, often indefinitely. As investors and traders, we should focus on the phases that are recognizable to us. Long term "value" investors may buy stocks during the accumulation phase, and are willing to wait for the growth phase to sell, no matter how long that might be. Traders on the other hand, might wait for a definite sign the stock has entered the growth phase, and then buy. This often means they capture less of the stocks gains, but their holding time (and risk) is often reduced substantially.

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