Timing Market and Economic Cycle Phases
March 20, 2016
Knowing what phase of the market cycle is prevailing can assist an investor with an investment strategy known as cyclical investing. The chart above notes the 2007 to 2008 peaks and decline as financial markets tumbled and a recession occurred. What follows is an in-depth analysis using market and economic cycle charts, and StockTouch app, to show how the 11 sectors have been fairing the past year. Keep in mind that this cycle discussion is generally based on theories than “the cycles are 100% accurate from proven science.”
Please note: This analysis is mainly macro-driven. That means the analysis is more suited towards investing and choosing more mid-term (2 months+) and long-term (365+ days) targets. While this analysis may not be suited for day traders, I think a macro perspective could be useful for swing trading strategies. An example is the Consumer Goods sector is heating up, and $AAPL becomes a great target for swing trading with a two to five day hold.
Market Cycle
The stock market is either bullish or bearish goes the general paradigm. Bullish means equities are generally increasing in value in the majority. Bearish means equities are generally falling in value in the majority. This means that when looking at a general market indicator, such as $DJIA, that general patterns can be seen. 8 phases of the market cycle are often typified.
- Early Bull
- Mid Bull
- Late Bull
- Top
- Early Bear
- Mid Bear
- Late Bear
- Bottom
Economic Cycle
The economic cycle consists simply of recovery and recession in most discussions. In a recovery consumer spending increases and businesses ramp up efforts to meet demand. In a recession consumers spend less and businesses reduce capacity to weather higher supply. 6 phases of this cycle are generally noted.
- Early recovery / trough
- Mid recovery
- Late recovery
- Early recession / peak
- Mid recession
- Late recession
Most economic and market cycle charts show the market cycle preceding the economic cycle. The thought is that financial experts and investors see the economic cycle signs before actual reporting of the economic stage occurs.
The market clock from Citi Financial above shows the best time to buy equities as a recession ends and recovery begins. Other economic signals appear on the outside of the clock to aid in economic cycle identification. Citi Financial is the source of this generalized model.
Quick Sheet Of Sectors To Target
The following sectors prevail, that is stock values gain, in the market and economic cycle phases identified below based upon generalized discussion thus far. Market is shown first, economic second, and the signs of economic stage third.
- Consumer non-cyclicals: early bear and late recovery; signs: rising overseas reserves, rising large caps, and rising commodities
- Consumer cyclicals (durable and non): late bear and peak (early recession); signs: rising interest rates and short-term government bonds
- Healthcare: early bear and late recovery; signs: rising overseas reserves, rising large caps, and rising commodities
- Financials: late bear and peak (early recession) AND early bull and late recession; signs: rising unemployment and corporate bonds AND rising interest rates and short-term government bonds
- Technology: mid of early and mid bull and early recovery; signs: falling real estate, rising high yield bonds, and rising small caps
- Basic industry: late bull and before mid recovery; signs: falling interest rates and rising shares.
- Capital goods: between mid and late bull and between early and mid recovery; signs: falling interest rates and rising shares.
- Transportation: early bull and late recession; signs: rising unemployment and corporate bonds
- Energy: top and mid recovery; signs: rising resources, rising value stocks, and rising inflation linked bonds
- Utilities: between early and mid bear and late recovery; signs: rising real estate
- Precious metals: top and mid recovery; signs: rising resources, rising value stocks, and rising inflation linked bonds
Early recession and signs: defensive sectors in the news and falling shares
None and signs: rising high quality assets, falling resources, and rising long-term government bonds
Stock Touch Charts
Stock Touch is an iPhone trading (investing) app that shows tickers in a sector and heat map view. The app is free. This app is great for trying to determine which sectors are doing well currently thus allowing the correlation to what stage of the economic cycle we’re in. With market and economic cycle known we can predict upcoming possible uptrending sectors and related tickers.
The app offers charting, ticker research, and other filtering capability, such as top ETFs and global stocks, in addition to its unique hear map view.
Attached are 1-year, 6-month, 3-month, and 1-month charts from Stock Touch. What are these four time periods telling the analyzer? We can see the following quickly:
- Energy
- Materials are up 27% the past month versus down 19% a year ago. The trend is similar to energy.
- Industrial is up 12% the past month after a slow recovery from down 5% a year ago.
- Some outliers are: Utilities peaking three months ago and appear to be declining the gains %, and the sector is lagging others in gains. Financial is up 9% but hasn’t really declined as Energy, Material, and Industrial has a year ago.
Where Are We?
So what market and economic cycle can we deduce we’re in given the above analysis? To me, we’re in the top of the market cycle and nearing middle recovery for economic. Stock Touch places Precious Metals into the Materials sector. Energy, Materials, and Industrial line up with 9) and 11) of the first chart posted.
What Tickers Should Be Traded
So what should we invest in? We should probably be the eyeing inverse funds for 9) Energy, 11) Materials, and Industrial. Inverse funds give gains when assets being shorted drop in value. The next upcoming sectors for those going long for gains would be 3) Healthcare and 1) Consumer Non-Cyclical.
FinViz.com offers a heat map view of sectors with an included sizing by market cap by ticker. This ticker sizing helps an analyzer understand large cap tickers.
With Healthcare and Consumer Goods on the radar we can see large cap tickers that are future targets for gains. In healthcare, $JNJ, $PFE, and $GILD are top invested. In consumer goods, $AAPL, $PG, $KO, and $PEP are large caps.
Further Research
After receiving some comments I thought I’d add some further reading suggestions. Trading and investing isn’t always an empirical science.
Happy investing!
