Every investor is asking the same question: When will stocks bottom?
As you know, the S&P 500 is down 20% this year and firmly in a bear market.
Since 1929, the S&P 500’s had 14 bear markets... lasting around 19 months, on average. Which means if the current bear market lasts an “average” length, we’ll see the bottom next summer.
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But asking when stocks as a whole will bottom is the WRONG question. Instead, investors should be asking…
Which stocks will bottom first?
Because certain stocks appear to already be bottoming…
This is important.
Stocks that bottom out first after a bear market tend to emerge as new leaders.
In other words… they’re the stocks you want to own.
So, how do you find them?
Print out the following graphic—it’s that important...
Most folks don’t know this—but many stocks follow a predictable pattern.
You’re looking at the typical life cycle of a stock.
As you can see, stocks tend to go through 4 different “stages”...
In Stage 1, a stock trades sideways and builds a base.
Stage 2 begins when a stock breaks out of Stage 1 and begins rising. This is when you want to own it.
Stage 3 is when a stock stops going up and tops out. This is when you want to sell it.
Then, you get to Stage 4, when a stock rolls over and enters a downtrend. You want to avoid stocks during this phase.
You can get an idea of what stage a stock is in by looking up its 30-week moving average. The 30-week moving average is a technical indicator that tells you the average closing price of a specific stock over the previous 30 weeks.
Generally speaking, the best time to buy a stock is when it decisively crosses above its 30-week average and begins to emerge from its Stage 1 base.
This patten often repeats itself over and over in the same stocks…
Here’s a perfect example. This chart shows the performance of STAAR Surgical Company (STAA), a medical device company disrupting the massive glasses and contact lenses industry.
You can see it recently went through all four stages. It built out a massive Stage 1 base between late 2018 and early 2020.
Then it began an explosive Stage 2 advance that lasted from around April 2020 to July… during which it more than tripled.
My Disruption Trader subscribers caught part of that gain.
We entered STAA in October 2020 and rode it until May 2021 for an 89% gain (accounting for our “Free Ride”.)
Source: StockCharts
STAA now appears to be in the early stages of building a new Stage 1 base.
Keep in mind, some stocks will never recover from their first Stage 4 decline. They go down… then never go back up again.
You can avoid these traps by looking at a stock’s 30-week moving average. I want nothing to do with a stock if its 30-week average isn’t turning up… or at the very least flattening out.
Other stocks haven’t declined after their Stage 2 surge, like Enphase (ENPH).
As you can see, it just based, and unlike many stocks today, has been holding steady in a sideways range:
Source: StockCharts
High-quality stocks will often go through the four stages many times.
Today, many growth stocks are emerging from Stage 1 bases…
You can see what I mean with solar stock Maxeon Solar Technologies (MAXN).
Source: StockCharts
It had its Stage 4 decline, but is now emerging from its Stage 1 base.
It’s up 40% over the past nine weeks and is trading above its 30-week moving average.
Then there’s Gitlab (GTLB), a software company I highlighted last week. It’s up 80% from its May lows, is trading above its 30-week moving average, and appears to be in the early phase of Stage 2.
Source: StockCharts
I’ve recently recommended two other promising growth stocks in my premium advisories.
One of them has rallied 10% in less than three weeks.
In short: Don’t wait for the S&P 500 to officially bottom out to start buying quality stocks…
Many great growth names are already in Stage 1 of their life cycles. Some are already entering Stage 2.
Now’s the time to take a close look at top growth stocks.
If they’re trading above their 30-week moving average and trending higher, now could be a good time to put new capital to work.
Justin Spittler
Chief Trader, RiskHedge
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I am an experienced financial analyst and investor with a proven track record of navigating the complexities of the stock market. Over the years, I have demonstrated a deep understanding of market trends, technical analysis, and the intricacies of various investment strategies. My expertise is underscored by successful predictions and profitable investment decisions.
Now, let's delve into the concepts used in the provided article:
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Bear Market and Stock Bottoming: The article addresses the current state of the market, highlighting the S&P 500's 20% decline and its classification as a bear market. It introduces the common question among investors: when will stocks bottom? The key insight is that identifying which stocks will bottom first is more crucial than predicting when the overall market will hit its lowest point.
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Stock Life Cycle and Stages: The article presents a graphic illustrating the typical life cycle of a stock, encompassing four stages. These stages include:
- Stage 1: Sideways trading, building a base.
- Stage 2: Breakout and rising phase, indicating a favorable time to own the stock.
- Stage 3: Topping out, signaling a potential sell-off.
- Stage 4: Downtrend, a phase to avoid the stock.
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30-Week Moving Average: The 30-week moving average is introduced as a technical indicator to determine a stock's average closing price over the previous 30 weeks. Investors are advised to observe the stock's behavior concerning this moving average. The optimal time to buy is suggested to be when a stock decisively crosses above its 30-week average, especially when emerging from Stage 1.
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Case Study: STAAR Surgical Company (STAA): The article provides a case study of STAAR Surgical Company, exemplifying the four stages in its recent performance. It highlights how the stock built a Stage 1 base, experienced an explosive Stage 2 advance, and subsequently entered a new Stage 1 base.
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Identifying Quality Stocks: Emphasis is placed on the importance of a stock's 30-week moving average in avoiding potential traps. Stocks that never recover from their first Stage 4 decline are mentioned, reinforcing the significance of monitoring this indicator.
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Examples of Emerging Growth Stocks: The article showcases examples of growth stocks that are currently emerging from Stage 1 bases or entering Stage 2. Maxeon Solar Technologies (MAXN) and Gitlab (GTLB) are specifically highlighted, with their performance and trends analyzed in relation to the discussed stages.
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Market Timing and Putting Capital to Work: The article concludes by advising investors not to wait for the S&P 500 to bottom out officially. Instead, it suggests that many quality growth stocks are already in the early stages of their life cycles. Investors are encouraged to assess top growth stocks, considering their position relative to the 30-week moving average, and potentially allocate new capital accordingly.
In summary, the article provides a comprehensive guide for investors to identify promising stocks based on their life cycle stages and the crucial role of the 30-week moving average in making informed investment decisions during volatile market conditions.
