The cinderella strategy is a concept designed to explain the life cycles of a public stock in the equities market.
It’s named after Cinderella because the idea is the shoes vanish at 12 and the party is over.
You never want to be the last one at the party, or worse, think the party is going on while it ended hours ago.
There’s a similar effect in the stock market because once a stock starts underperforming, you better not argue with it’s results and get out as soon as possible.
Essentially, at 12 AM the party has ended.
The stock has topped and it shows the first signs of decelerating growth.
Just like cockroaches, if you’ve found one sign of deceleration, it’s a high probability it’s not the only one and that you are likely to see more in the future.
From 12 to 3, the stock is getting hammered day after day but it’s still in the headlines.
Heroes want to step in and buy the stock, but that’s like trying to catch a falling knife.
More times than not you’re going to cut yourself and bleed rather than perfectly catch the handle.
This phase is where traders and investors (especially amateur ones) alike lose the bulk their money and it’s the most deceiving aspect of the market - you only know the party has ended after the fact.
Which brings me to the next phase from 3 AM to 6 AM where the stock is starting to show some neglect.
Even on not-so-bad earnings, the stock is getting hit left and right.
In this phase, the stock starts to become unknown and show severe neglect financially, price action wise, attention wise, and volume/liquidity wise.
This is where value investors like to pick up on potential bargains when stocks are looking relatively cheap.
Keep in mind, stocks can continue to be this way until the business just fails and becomes bankrupt but every now and then, one will actually have a turnaround story.
Given the stock bottoms at 6 AM, we now move to the next phase of positive surprises.
The stock beats expectations for the first time, sometimes in a big way.
Just like the cockroaches, if this happens once, it’s likely to happen at least a few more times going forward.
Now the stock starts to show some demand for the first time in a long time, and is starting to not become so neglected.
Early-growth investors thrive in this space, often keeping an eye out on explosive earnings surprises and price moves near bottoms to capitalize on the potential of the next phase.
So the earning beats compound and price compounds faster which leads to the hours from 9 to 12 of pure momentum.
The stock starts hitting 52-week highs and hits headlines for being an absolute game changer.
Just like the desolate after party, no one knows how long the party will last either.
Could be a couple quarters or end up being a few years, but eventually all the good news will be priced into the stock.
And just like that, the party will end abruptly, the stock will put in a major top, and people will be complacent.
No one wants to leave and they will start arguing “oh this is just one bad quarter, XYZ company will be back.” Before you know it, the cycle starts once again.