What is happening to high-growth/leading stocks and its “poster child” $ARKK (Chart 3), and why?
In a nutshell, as Mark Twain famously said: “history does not repeat but it often rhymes”.
Stock prices of high growth/leading stocks tend to follow what is called a “stock price maturation cycle” – in other words, there are four stages of a stock’s life (Chart 1):
Stage 1: Basing Area (Consolidation)
Stage 2: Advancing Phase (Accumulation)
Stage 3: Top Area (Distribution)
Stage 4: Declining Phase (Capitulation)
Source: Stan Weinstein’s – Secrets for Profiting in Bull and Bear Markets
In addition, leading stocks in a bull market exhibit typical cycle dynamics consisting of a period of significant out- and underperformance (Chart 2).
If we look at the chart patterns of most high-growth/leading stocks since March 2020, many of them are already in Stage 4, having risen significantly in recent months and subsequently topped out.
At Tramondo, monitoring the behavior of leading stocks is crucial to our hedging framework and belongs to our third pillar (out of four) “market internals”.