Find out the strategy that will help you to trade on the M1 timeframe!
2021-04-27 • Updated
Information is not investment advice
While growth stocks were trending up during the last year, now the time has come for cyclical stocks to take the lead! After reading this article, you’ll …
- know what cyclical stocks are,
- learn how and when to trade them,
- and maybe find your favorite ones!
What are cyclical stocks?
Perhaps, some of you have already guessed from the name “cyclical”, that it’s something about cycles. Yes, you’re definitely right! The term ‘cyclical’ refers to a stock of a company, which performance generally follows the economic cycle of expansion, peak, recession, and recovery. Imagine a roller coaster: cyclical stocks rally up in times of economic expansion, hit record highs when the economy is at its peak, fall during recessions and market instability, and finally reverse up and start climbing again amid recovery. Well, the idea is clear: stocks mimic economic cycles. But can you name the real examples or some segments? What do consumers tend to buy more during prosperity but spend less on during a recession? Think a few seconds and then compare with the examples below!
Well, cyclical stocks are usually the companies that offer non-essential goods or services, such as appliances, cars, and entertainment. Besides, cyclical stocks tend to be volatile and produce higher returns during periods of economic strength.
Examples of cyclical stocks
The travel, hospitality, and entertainment industries have been hit hard by social distancing restrictions amid the pandemic. Since the constraints are easing, people are more willing and able to spend money on traveling. Thus, such stocks as Booking, TripAdvisor, Royal Caribbean, Walt Disney, and Carnival are edging higher.
Automakers tend to fall during recessions as consumers save money and keep their old vehicles instead of buying new ones. In opposite, people are more motivated to buy new cars during expansion. Therefore, such stocks as Ford, General Motors, and Ferrari are likely to jump in 2021.
Banks are usually losing their profits during recessions. Most people stop taking mortgages, and loans or even struggle to pay their debts. Besides, interest rates tend to fall before and during recessions, as a result, banks’ profit margins decline. JPMorgan, Goldman Sachs, and Bank of America should rise in 2021 amid the global economic recovery.
It’s significant to pay attention to market trends as sometimes a recession could push up typically cyclical industries. For instance, tech stocks were viewed as cyclical stocks, but the stay-at-home regime and remote work amid the pandemic boosted the demand for cloud services and streaming platforms. Therefore, big tech stocks gained a lot and outrun pre-pandemic levels.
Why are cyclicals good for trading?
Cyclical stocks are worth trading for several reasons.
Cyclical stocks tend to be volatile. Thus, it offers a wide range of opportunities for traders to go both long and short. When the economy is growing, cyclical stocks rally up and usually perform way better than non-cyclical ones. Besides, in times of recession, cyclical stocks tend to go down. Therefore, investors who know that from the beginning can open sell orders.
It’s a good idea to try finding undervalued cyclical stocks by the end of the recession as when economic recovery comes, the stocks with higher growth potential are likely to rocket! So, it’s better to define them as soon as possible.
It’s common knowledge that portfolio diversification is a perfect way to minimize possible risks. Thus, most experienced traders prefer holding both cyclical and non-cyclical stocks as sometimes it’s hard to predict the time of the future recession or expansion.
How to trade cyclical stocks?
Experienced investors always go by the rule that says “Don’t put all your eggs in one basket”.
Although the market is flat 70% of the time, most of the trading strategies are for trend trading. Thus, most traders use only 30% of the trading potential! If you want to be more productive, pay attention to this strategy.