As the thermostat drops to 68F Stage 2 kicks in
Michael, I think you are being confused by the use of the word "stage". It is applied to both thermostats and compressors and unfortunately does not mean exactly the same thing for each one. Moreover, the terms do have some loose connection making the whole picture even harder to discuss or sort out.
For example, as it applies to compressors; almost none of the compressors discussed here are true two-stage units, even though they are referred to as "two-stage". Technically, a stage is a separate engineering process. In these scroll compressors, Stage 2 is just a further continuation of the same Stage 1 process. I'm not saying this description should be used, but maybe another way to think of it is "low power" (more efficient) or "high power" (a little less efficient, but more output).
Your thermostat also has "stages" during which it sends signals to the heat pump. In (thermostat) Stage 1, it says to the heat pump "Hey, I've got a temperature setting we need to try to get to, so start up and get to work." That engages (compressor) "Stage 1". That is the most efficient output stage for the compressor.
After a while, the thermostat sees that it isn't at the desired setpoint (or it isn't getting there fast enough) and decides to enter (thermostat) Stage 2. Now, it tells the heat pump "We aren't doing well enough, better work harder." At that point, the heat pump compressor goes to (compressor) "Stage 2" - full output.
After a while longer, the thermostat sees that it still isn't where it wants to be and decides to enter (thermostat) Stage 3. It tells the compressor "Keep giving me full output" (compressor) "Stage 2", but it also sends a signal to the resistance coils (AUX) to start up and start heating as well. What's even more confusing is that the aux heat resistance coils have their own "stages" in which 1 coil, then the next and the next and so on start up in order to supply enough heat to meet whatever the demand is.
Normally, all of these operations are time sequenced, giving each piece of machinery a reasonable amount of time to do its job before the next "Stage" is entered. Depending on your thermostat and other options, you can probably override and cause these things to occur in different ways.
Finally, depending on inputs, it is possible for the thermostat to enter "emergency" stage in which it decides something might be wrong, so it shuts down the heat pump compressor and the loop pump and goes just to distributing AUX (resistance) heat.
Hope this helps you in describing what is happening.