Cyclica stsock trading trategies.
Cyclical stocks refers Quickly change their direction from Higher to low as well as quickly turn around from the Bottom.. Economic activities will adversely impact on some sectors in which stocks would journey along with that direction that is known as Cyclical stocks.
Cyclical Industries such as Construction, Energy, Cement, Chemicals, Metals, and Capital goods which industries will outperform during the economic peak . In contrast, it will perform poorly during the Economic contraction.
In terms of the stock market investment which will play a pivotal role when constructing the portfolio because these types of the stocks would give huge returns in the short term this is because these are key drivers of Economic growth so the Portfolio managers hold a large portion of the Cyclical stocks during the Economic boom period. Whereas, they would reduce stock holding when the economy is getting showdown.
Cyclical industries which have high Operating and Financial leverages, During the Economic acceleration period which industries will run with full capacity, get pricing power, and cash flow will improve dramatically. These scenarios will change radically during the Economic showdown or Economic crisis. Prices will drop due to lower demand, running with lower capacity that hits operating margin because industries are High capital intensive. Higher fixed costs swallow operating profits. Generally they need to upgrade their product sequentially to compete with rivals so that they need to invest money for Technology upgradation, New product development, Replace the older Equipment.
Interest rate cycle and Cyclical stocks
Interest rate cycle is highly correlated with Cyclical stocks. In terms of India, the majority of Indians are buying House, Car,Electronics & Luxury items through EMI. Higher Interest rate would increase Monthly Installment, in such a situation they would postpone their purchasing decision. On the other hand, Lower Interest encourages them to buy more products because the cost is likely to be affordable to them.
Housing sales, and Automobiles are leading indicators of Economic health, as slowdown of the household spending is an earlier indicators of Economic stagnant that could accelerates finished goods inventory
Cyclical industries are naturally capital intensive, they will use more Financial exposures to expand their business during the lower interest cycle, which will create additional Financial burden when elevating the interest rate.
Commodity Price vs Cyclical stocks
Those industries typically consume Base metal, and Energy Commodities, Higher commodities that will increase input costs that leads to lower operating costs. By this momentum, The entities have to pass to End users eventually sales volume decline. Eventually competition might spiral up then they begin to cut the price in order to retain their market share.
I have given below some key reasons for increase of Commodity price
Market demand exceeded the supply
Free trade Agreements and Foreign trade policies
India has made foreign agreements with many countries. Japanese companies are piling up huge amounts of steel because of the free trade agreement between India and Japan .
Likewise Paper Industries are also facing lots of competition barriers by Importing paper. Chineses Electric transmitters, Electronics, and Automobile OEM are struggling to compete with Chinese Import products
The Indian Chemical Industries have been facing lots of trouble by China being dumbing the Chemicals in the word market.
When to invest in Cyclical stocks?
Cyclical stocks are probably trading at a low PE ratio, so PE ratios are another valuation metric that will not be effective methods to evaluate these types of stocks.
First thing is to understand the nature of Business which will vary from industry to industry. We look at them in general terms. Low Interest rate, Disposable Income, GDP Growth rate, and Government's fiscal policy also affect Cyclical stocks' performance.
I have given some ideas on how to select the sectros at the right time and what factors could impact on each sector.
Conclusion
These stocks fall in the Boom & Burst category. Any wrong entry will burn you. Traders must be watching important Macro Events such as RBI Monetary policy, GDP Numbers, IIP Data. and Bond yield curve.
The trader who needs to know the market pulse and market expectations before coming out with key Macro Events data. Thoe stocks are more sensitive that will change its trend more quickly
Contra investments might be a better strategy to multiply your money by Cyclical stock investments. Put your money in the worst situation and book your profits when Economy is getting hot.
The viewers can get more clarity by read one of my Articles How to predict the stock market
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