Cyclical Stocks

cyclical stock

Cyclical Stocks are simply those of companies whose success rise and fall with the business cycle. They boom when the economy is expanding, and tend to fade when the economy contracts.

Cyclical-stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession

Of course most stocks tend to be cyclical to one degree or another. After all, when the economy falls into a recession, consumers and businesses cut their spending and a range of industries are hurt as a result.

When the economy is doing well, people can afford to buy new cars, upgrade their home furnishings, go shopping and travel. When the economy is doing poorly, these discretionary expenses are some of the first things consumers will cut. If a recession is bad enough, cyclical stocks can become completely worthless as companies go out of business.

But true Cyclical-Stocks suffer even more when the economy slows.

Auto manufacturing and home-building are examples of cyclical industries. Why?...when the economy is strong, consumers feel more confident and spend more such as on new cars and homes.

Other cyclical groups are:

  • Air-lines
  • Railroads
  • Machinery
  • Copper

These stock price movements tend to be more short lived when they do occur, and these stocks are much more apt to suddenly falter and encounter disappointing quarterly earnings reports.

So the big question is, what stock trading system should a stock trader use in the stock market?

There is no right or wrong trading system to use. Depending on your own trading style and personality, any of them can work well for you.

It's worth noting that Cyclical's sometimes make their best price moves long before the improvement in the economy is obvious to everyone.

The reason is, once professional investors see that the economy has bottomed out, they have done their cyclical analysis, and they bid up these stocks in expectation of growth ahead.

So by the time the average person can see that the economy is on an upswing, cyclical's already may have posted their best gains.

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