Friday, September 9, 2011

Cyclical stocks for people with confidence

As you might know its smart if you buy a stock cheap and sell expensive. It’s even smarter if you can buy rapidly rising stocks in good times and then replace them with stable when the stock prices start dropping.

It's easier said than done, but it is still a discipline that every equity analyst will try to convince you that he is the champion in. Before you even begin to trade shares on the stock market peaks and valleys, it might be useful to note that private investors indeed constitute a significant proportion of trades on the exchange. But when it comes to volume, it turns out that private investors represent only a marginal proportion of total trade. Put another way: The professionals roll you down, if you're venturing out into a showdown with them.

Cyclical stocks are sensitive to the economy and usually cover everything that has to do with non-vital production of goods, services, and transportation. Defensive stocks are benefiting on the fact that people cannot do without the products it produces. During periods of recession, people can stop traveling, buying cars, TVs, furniture and more. But they must get their food every day, and they also need medicine if they get sick. They cannot just terminate the insurance, account in the bank or subscription to the phone, so this kind of stocks belongs in the category of defensive stocks. Because of the more regular consumption passive stocks are also known to be more stable in their movements than the cyclical stocks. On the other hand defensive stocks do not rise as fast when it periodically goes really well for the cyclical stocks.

Just as the usual recommendation is that you must purchase shares on the bottom and sell at the top, says the recommendation with regard to the cyclical stocks that you must buy them in good times and then switch to the more stable stocks in a downturn. It should be forbidden to give such recommendations, it is tremendously difficulty to be ahead of the market and not at least look into the future. Again, we note that only a few have this capability, while too many claims that it is something they can do.

The recommendation should rather be that you must always have both, because you can win some of it on the swings you lose on the roundabouts - and vice versa. If you do decide to invest in so-called cyclical stocks to achieve quick wins it requires that you follow closely how things are going with the economy. This discipline is particularly difficult, because share prices typically reflect how it's going to go with the rest of the economy, and only to a lesser extent, a reflection of how it actually goes. An upswing starts with people buying more stuff; they feel richer and dare again to spend some of their savings. When companies come with quarterly reports, they report that their order books have been thicker, and that they expect a higher turnover. The positive signs cause the shares to rise - if they had not already risen on rumors. Only later we see that unemployment is falling because the companies start reacting on their expectations and employ more people in manufacturing, service and transportation, etc. It creates optimism, and thus both consumer and business confidence grow. But once all these figures come out, share prices have long since risen, and unfortunately this is also true when it goes the other way.

Share enthusiasts recommend from time to time that you need to trade shares based on how central banks raise interest rates. The motto is that when the central bank raises interest rates, the economy slow down, and it's time to sell out of cyclical stocks before they decrease in value. Some may be able to make money that way, but it's not something that should be recommended. Generally, economists are lousy at predicting what the central banks will do. In general the shares start to react even before the economy turnaround can be documented in the economic indicators. And so the market has already turned before you reach to switch horse!

No comments:

Post a Comment