OK, time for school.
If you ever took any business or economics classes, you probably remember at least a little something about the business cycle. Or maybe just the term “business cycle”…
For me, it was always something that — like the PPP, purchasing power parity — I knew I had heard before, but wasn’t exactly sure what it meant.
But, whatever the case, the general gist of the business cycle (or economic cycle) is that the economy naturally fluctuates between periods of expansion (growth, yay!) and contraction (recession, boo!). Things that are good eventually become bad, and things that are bad eventually get better.
It’s just like the seasons, and it’s something that we can chart out throughout history. These cycles are just a fact of life.
This matter a lot to us as traders, though, since the economic cycle is the single biggest catalyst for the U.S. stock market. Unless you’re a terrible stock picker, the odds of seeing big losses with a reasonably good stock is fairly low if the economy is in an early stage of expansion. This is when growth and tech stocks rally sharply and sometimes irrationally.
On the flipside, if the economy is currently in a late contraction stage the odds of seeing aggressive gains from growth stocks is a distant dream and investors are much better off with defensive stocks.
You just can’t beat the house in these situations.
Where are we in the cycle right now?
Well, no one really knows for sure. Factors such as GDP, interest rates, levels of employment and consumer spending can help to identify the current stage of the economic cycle that we are currently in, but the truth is it’s usually pretty hazy. Sure, spotting the early stages of expansion or the late stages of contraction is easy, but figuring out the other stages is more difficult.
That’s where Sector Analysis comes in.
Because every stage of the cycle favors a different market sector…
And the most direct way to trade this information is vua U.S. sector ETFs, which combine the most liquid and best performing stocks in each of the main sectors into one simple-to-trade asset. This way, we can target individual sectors of the economy without having to buy numerous stocks in each separate industry group.
And there’s more…
Sector ETFs are less risky
One major advantage of owning an ETF instead of individual stocks is less unforeseen volatility, which equals less risk.
When you own one or two individual stocks and there’s earnings news for example, the stock can open the next day several dollars higher or lower, without any type of warning and without giving you an opportunity to exit the trade.
Sector ETFs, on the other hand, hold a basket of several different stocks which minimizes the impact of 1 or 2 different assets causing major change in price.
Sector ETFs trend better than stocks
The primary reason for this is because individual stocks release news only when there are earnings revisions or company announcements, which typically happens only during earnings season.
But, since ETFs hold numerous stocks, there’s always a fundamental story being released that impacts or drives the price of one of the stocks that the ETF holds, either higher or lower. This causes ETFs to exhibit sustained trends while stocks tend to trade randomly when there’s little news being released.
Sector ETFs are more liquid
ETFs have higher liquidity than 85% of all individually traded stocks. I’ll say that again: higher liquidity than 85% of all individually traded stocks.
What does this mean? It means a tighter spread between the bid and the offer, which can translate into favorable trade executions that save you money in the long run.
All this to say…. that this is why I created the 16 Hour Jump Trade Profit Alerts strategy. It takes us less than 16 hours to find explosive opportunities that make you a ton of money.. and want to know the cool part?
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Also… traders (at least the good ones) have a ton of rules that they follow every day. Only trade when you see trend X, always get out of a trade when X happens, never stay in a certain type of asset longer than a certain amount of time, etc. And I’m no different. I learned long ago that successful trading has to be grounded in rules and structure.