You know that stock you see making new highs?
The one everyone is talking about…
The one making everyone money…
The one you’re eager to buy even though it’s already up several hundred percent.
What if I told you there’s an 80% chance that it will get cut in HALF?
That’s right – a 50% drop.
This statistical probability is known at the “80/50 Rule.”
I was introduced to the concept by legendary trader, Mark Minervini.
It goes like this…
Once a secular market leader puts in a major top, there’s an 80% chance it will decline by 50% and a 50% chance that it will decline by 80%.
Think about that for a minute.
The 80/50 Rule in Action
After a major sector-leading stock makes a huge upward move, it will almost assuredly drop by 50% when it ultimately tops out.
And there’s a 50/50 chance that downward move will be as much as 80%.
The average decline for big market leaders once they finally top is 70%.
Remember when solar stocks were the hottest thing in the market?
First Solar, Inc. (FSLR) climbed almost 1,000% before it came crashing down.
In 2019, it was Beyond Meat, Inc. (BYND).
BYND was the darling of Wall Street – the hottest IPO of the year.
But once again, the 80/50 Rule held true, and investors got a second chance to buy following an 80% decline.
This year, we’ve seen huge declines in the pandemic stocks.
For instance, check out Zoom Video Communications, Inc. (ZM)…
Or Peloton Interactive, Inc. (PTON)…
Or Penn National Gaming, Inc. (PENN)…
They delivered huge returns in 2020. But they all took 50% haircuts after topping out.
I tell you about the 80/50 Rule in hopes that it will help curb your desire to chase rising stocks.
It doesn’t work every time. Some stocks will just keep going higher.
But more times than not, the market will give you another chance to buy.
So, be patient, and let the 80/50 Rule play out.
Embrace the Surge,
Editor, Traders Daily Direction