When analyzing the stock markets it’s important to understand the fundamentals of the business cycle.
All of the global economies go through a business cycle of periods of expansion and contraction with different countries economies impacting on each other. The crash of 2007 and subsequent financial meltdown has illustrated this perhaps more than ever before.
Whilst Governments intervene to the extent that they are able, via interest rate and monetary stimulus manipulation, the business cycle will, we feel always remain. How steep an expansion or contraction may be can possibly be influenced but overall you are always going to get good times and bad. The shrewd investor simply needs to accept this fact and trade accordingly, if at all.
The trick for online stock traders is to anticipate these big market moves and assess the impact on their positions both now and in the future.
Let’s split up the cycle into it’s four main components:-
Full Recession > Early Recovery > Full Recovery > Early Recession
(Or Bear Market > Bull Market > Bull Market > Bear Market)
Recession is an emotive word but let’s ignore that for now and just look for the signs to watch out for.
At the point of ‘Full Recession’ perversely is when the first signs of optimism are appearing again. However interest rates remain low and demand is weak.
During the ‘Early Recovery’ optimism increases as does demand and production whilst interest rates hit their bottom plateau.
At the point of ‘Full Recovery’ optimism begins to wain and productivity begins to tail off or flatten. During an ‘Early Recession is when optimism and productivity fall the sharpest and interest rates begin to drop.
Let’s look at what industries do better at each stage:-
Full Recession >
Early Recovery >
Full Recovery >
Early Recession >
It’s well worth keeping in mind that different sectors of the economy fair better a different times of the Business Cycle. Keeping an eye on those sectors also helps confirm where we are, or are headed, in the cycle. Your online stock broker will also advise you on their opinion of where the market is headed.