Stock Market and Business Cycles

It's no secret that observers suggest that there is a relationship between stock market cycles and business cycles. Typically the stock market cycle leads the business cycle by approx. 6 months - we knew we were entering a recession about 6 months ago - its now been officially confirmed (two consecutive quarters of negative grow in GDP).

But how can the short term trader use this to their advantage?

During the business cycle certain sectors perform differently at certain stages in this cycle. Assuming we are at or near the trough in the business cycle (which is yet to be confirmed), we would typically expect to see certain sectors outperform others. These sectors would be;

• Technology
• Transport

Conversely we expect the following sectors to be under performing relative to their peers;

• Financial Services
• Construction
• Manufacturing (typically cars)

It would take someone who has had their head buried VERY deeply in the sand to have missed the fact that the financial services, construction and manufacturing sectors are all pretty screwed at the moment, but what of those sectors that may now start to provide glimpses of a recovery? Lets look at each in term.

Technology

This graphs shows that the software sector is indeed showing signs of recovery. Nothing spectacular at the moment, but the index found support at 300, and has rallied 20% since its November lows.

From a purely technical perspective, The moving averages are turning bullish and a long buy limit at around 350 is a good value trade.

When we also consider the fundamentals, the technology sector does represent long opportunities in a bear market. Web 2.0 has matured as a concept over the last two years with stuff like social networking really coming into its own. Debt free software companies could now find opportunity, as struggling companies look to streamline their back offices and extract every last penny from there current customer base, whilst at the same time look to find new customers in innovative and cheap ways. I'm going to focus on this sector in the coming weeks and see if I can find a couple of gems in amongst the Nortels Networks of this world!!

Transport

Transport is not showing signs of recovery, but its certainly showing signs that its found the bottom - it has tested 1190 and bounced 3 times since November, but it is effectively trading in a channel between 1471 and 1190. A breakout to the upside would be a bullish indicator.

In bear markets, as trade tails off, so the need for transportation decreases. Look at British Airways to confirm this theory. However as consumers begin to spend again, so we would expect this sector to confirm this renewed activity. The added complexity around the Transport sector, is that it itself has its own 'internal cycle', which works in conjunction with both the holiday seasons and the retail seasons. There would however be some value to explore those transport companies that specialise in stuff like coaches and trains, as I think more people than ever will chose to holiday in the UK this year.

However you begin to build a portfolio, remember the key principles to managing your account at all times.

1. Develop your own strategy - Don't listen to tipsters or copy your friends ideas!!

2. Set a Stop Loss on each and every trade

3. Set a profit target

4. Don't let fear or greed guide your trading decisions