Tuesday, September 19, 2006

Market Cycles

I came across this handy representation of the Economic Cycle via the Big Picture, who sourced this from Matt Blackman of EquiTrend Weekly Market Watch. The key question asked was: Where are we in the cycle?

The best way to answer this is to check on leading and lagging industry sectors as published by Investors Business Daily, or listed at Barchart.com.

Four of the top 10 performing sectors are in the food inustry (Consumer staples). There are also two Service sectors in the top 10 too. In the bottom 10, four sectors belong to Building/Housing (Industrial Goods). Which should approximate to a situation as follows:

How you use this depends on your strategy. If you like to buy unloved stocks, then you are going to find Industrials, Technology, and Transportation 'cheap'. Dollar-cost-averaging works best to accumulate shares in these sectors as you are getting more shares for less as panic and fear are at a peak. Value players would look to Utilities and Financials. An opportunity to beat the crowd and acquire stocks in sectors soon to lead the market. Momentum players (and day traders) would wan't to take advantage of current hot favorites. They would be trawling for stocks in sectors like Services and Consumer Staples. The aim here isn't to hold, but to profit from volatility and greed. It would be at this point of the cycle Dollar cost averagers/Investors would be selling strong sectors and switching proceeds back to weak sectors.