Candlestick Trading Blog
March 5, 2010
Investing in the Business Cycle
| A common means of profiting from investing in the stock market is investing in the business cycle. Business cycles are fluctuations in economic activity and production that last for months or years. Business cycles occur during long term economic growth, long term decline, and times of relative economic stagnation. Investing in the business cycle takes advantage of how different market sectors perform during economic upswings and downturns. An investment strategy for investing in the business cycle during a downturn might be picking stocks in basic consumer services. During an upswing of the business cycle home builders, autos and the entertainment industry might be better stock picks. Long term investing typically ignores business cycles although the investor may engage in market timing when buying stocks at an opportune time in the business cycle. Business cycles are caused by a number of factors including availability of credit, fluctuations in the value of currency, gain or loss of economic markets, as well as political disruption and war. Despite being referred to as cycles these periodic disruptions in the economy and stock market do not recur on a clock like basis. Likewise their lengths may be months and sometimes years. What tends to be uniform is that certain stock market strategies are useful in investing in the business cycle. When stock market movement is downward, investors will often invest in stocks in stable companies, which pay dividends. Power companies, consumer products companies, and, usually, banks are considered good stocks to buy as the economy and business cycle head into a recession. During the low point of the business cycle companies making televisions, automobiles, boats, and other expensive or discretionary items will typically have less business and see their stock prices drop. When investors and traders believe that the stock market and business cycle are about to turn around they will begin again investing in the business cycle as they purchase shares of these depressed stocks. These individuals typically make money on the upward stock market trends in the second half of business cycle, the recovery. Stock option trading also takes advantage of movements in the business cycle. A trader anticipating the recovery of the market will purchase call options contracts on stocks which he or she expects to go up substantially in price in the second half of the business cycle. The only cost to this options trader is the premium paid for the option. The potential profit is the difference between the price of the contract, the strike price, and the price of the stock when he or she exercises the option. There are many theories as to what causes and what repairs business cycles. These go back hundred of years. Until the current day economists have argued about the exact causes of business cycles. Over that same time investors and traders have not worried about the esoteric details but have made money investing in the business cycle. Going back to Japan when Candlestick principles were established traders have known that Candlestick basics will help traders spot market reversals during a business cycle. Candlestick pattern formations will help the trader see when a stock is about to break either way out of support and resistance zones. For stock trading and long term investing it is the predictability of the business cycle that leads to profits with the ability to predict stock market prices throughout the business cycle. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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