Monday, December 1, 2008

Market cycles and Sectors

The stock market rises and falls in a cyclical fashion that often 'leads' the economic cycle by several months. The signs of an economic down turn are quite visible now, but the stock market had started to 'discount' that fact back in Jan 08.

Now that we have been in a bear market phase for more than 10 months, many investors are struggling to understand what they should be looking for next.

Some who had purchased earlier when the market 'broke' Sensex levels of 12000 and 10000 are losing money and thinking about selling out at the next rise. Others may be resigned to the fact that they won't see any profits for several more months.

When all the fundamental and technical analysis still leaves common investors bewildered, a look at how different industry sectors have performed during previous market cycles may be enlightening.

The first signs of a stock market revival become visible when stocks from the financial sector like banks and NBFCs (Non-banking financial companies), retail and transportation sectors start to rise and consumer durables like home appliances, cars and trucks start showing improved sales. The economic story is nothing but bad news.

As the bull market begins to mature, and the economic cycle starts to improve, the sectors to watch will be technology, capital goods (like construction machinery) and construction materials (like cement and steel).

These will usually be followed by chemicals, paper, non-ferrous metals, petroleum - when the economy starts to gather momentum. Near the peak of the bull market, the real estate and energy sectors tend to dominate.

The FMCG and Healthcare sectors come to the forefront as the stock market begins its bear phase.  The economic cycle tends to be at or near its peak around this stage.

As the bear market matures, utilities and services sectors try to hold the fort. The economy is now well and truly in its downward cycle.

As the poet T. S. Eliot wrote in "Little Gidding":

What we call the beginning is often the end
And to make an end is to make a beginning.
The end is where we start from.


Brawny M said...

Hello Subhankarji,

I found this link in google today and seems like this is what I was looking for since long time.

I was buying and selling shares just because somebody said someting but I never understood much about it. Fianlly i decided to put in some time to learn. I must say this is one of the most helpful and easy to understand site / resource.

I am starting to learn things, do you suggest anything that I must read (on this blog or otherwise) to be able to learn better?

You are doing a great job, if even 10% of the people(who buy shares) read this they would be saving lacs of Rupees thanks to you.

Brawny M

Subhankar said...

Appreciate your feedback.

There are plenty of articles about fundamental and technical analysis in the blog that you may find useful.

There is a list of books in the blog post of June 17, '08. Some of them are in a slideshow on the top of the right panel of the blog.

Happy reading!