18/03/2018 Stock Life Cycle - Different Phases & Identifying Position

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Life Cycle?

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How to Identify the Position in the Stock Life
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Cycle?
by Ankit Jaiswal on May 8, 2017
 Basic Finance (https://blog.elearnmarkets.com/basic- nance/),
Equity Market (https://blog.elearnmarkets.com/basic- nance/equity-market/),
Investing Basics (https://blog.elearnmarkets.com/basic- nance/investing-basics/)

Everything in nature goes through a cycle whether it is living organism or weather. Like living
organism passes through different phases of birth, growth, maturity, decline and lastly death
or rebirth. Weather also follows a cycle and there cannot be one season throughout.
Summer season is an unavoidable part of the weather cycle and it’s going to stay with you
for some time say around 4-4.5 months, whether you like it or not. Then it is followed by
monsoon.

In the same way, stock market also follows a cycle. After a bear phase, there will be a bullish
phase but however no one knows how much time it’s going to take. If someone wants to
enjoy the fruits when the situations are conducive, it’s important to adapt to the harsh phase
by being adaptive to the environment. The key here is patience.

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18/03/2018 Stock Life Cycle - Different Phases & Identifying Position

These cycles can be clearly observed in the market if someone looks at the long term charts.
Knowing this cycle can be of huge importance for trading and investing purpose. It may help
you in identifying that where a stock is in its lifecycle. However, in real life it’s very difficult to
identify the actual position in its lifecycle.

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18/03/2018 Stock Life Cycle - Different Phases & Identifying Position

Stock market cycle analysis: Different phases of the

stock life cycle
Phase 1: Accumulation Phase
This phase is generally seen either at the early life of a new company or after a prolonged
decline in the stock price of the established company. After a period of adverse business
condition, the company tries to reorganise during this period. This period may last from few
38months to many years. The stock here is largely held by the owners who don’t have any
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intention of selling until they realise a substantial profit.
38

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

With the improvement in the business condition of the company, the stock often breaks out
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of the long base and enters the growth phase on increasing volume. The steady
text=How%20to%20Identify%20the%20Position%20in%20the%20Stock%20Life%20Cycle%3F
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improvement in the business conditions and the entry of new investors who bid up the price
life-to obtain stock reinforces the uptrend. The stock price remains above its 200 DMA in this
cycle%2F)
phase and it’s better to remain invested in the stock until it holds its 200 DMA.

Phase 3: Distribution Phase

The smart stock owners know that the good times cannot continue forever and the stock
becomes highly overvalued during this phase. In the background of rosy earnings and good
economic news, the stock is often distributed to small investors. The top may range from
several months to 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 day moving average
(http://www.investopedia.com/university/technical/techanalysis9.asp).

Phase 4: Declining Phase

When the stock enters the declining phase, initially there will not be any apparent reason for
the same. 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 and
the investors may believe that the price has bottomed out. One should be careful during this
period and rather as the stock price approaches to its 200 DMA, it may provide good
shorting opportunity.
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18/03/2018 Stock Life Cycle - Different Phases & Identifying Position

Where are we in the stock market cycle analysis?

Let’s take a practical example to analyse that what is the position of the stock in terms of
stock life cycle.

This is a monthly chart of Reliance Capital. If we look at the monthly chart closely, we can
see after a good accumulation in the stock back in the year 2000-2005, the stock entered the
growth phase. It topped out in the year 2008 and entered the decline phase. Within 1 year
38time, it came back to the price where it started.
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The stock entered the accumulation phase since year 2011. Currently it’s facing resistance
at around 680 levels and once it breaches this level with good volume, it will enter the growth
phase.

Is the life cycle of business similar to the 4 stages of

the stock market?
The life cycle of business has a close connection with the 4 stages of stock market as the
stock market is a representation of the value of businesses.

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18/03/2018 Stock Life Cycle - Different Phases & Identifying Position

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Source: www.joshbersin.com
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The different phases of business cycle: Embryonic stage, Growth stage, Shakeout stage,
https%3A%2F%2Fblog.elearnmarkets.com%2Fstock-
life-Maturity stage and Decline stage is somewhat similar to the 4 stages of stock market cycle
cycle%2F)
i.e. Accumulation, Growth, Maturity and Decline phase.

Bottomline
The investors often look at the solid fundamental reason before investing in a company. But
one drawback of this approach is that by the time they have supportive evidence, it’s already
priced in and accordingly the stock has already moved by 300-400% i.e. the market has
already discounted the positive news.

Look to buy a stock when the stock is surrounded by bad news and nobody wants to buy it.
The weak hands will try to exit their position on such news. On the other hand, after a good
uptrend when the picture looks rosy, the smart investor exits their position and offloads their
stake to weak and news driven investors.

Know more about the basics of stock market in Introduction to Stock Market
(https://www.elearnmarkets.com/courses/display/introduction-to-stock-market) by
Elearnmarkets.

Related Posts:
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An Overview on Defensive vs Cyclical Stocks MARKET WRAP 18TH JAN 2016

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