WHAT IS CYCLICAL STOCK?
The overall economy moves in cycles. There are periods of growth, expansion, and periods of stagnation. And, of course, there are times when the economy is in free-fall.
Cyclical stock is a stock whose price is affected by volatility according to the cycle or market economy. These stock prices are inclined and in line with economic markets. That is, they tend to rise during economic booms and expansions, yet are likely to fall during a recession.
Amid coronavirus pandemic today, cyclical stock is considered economically sensitive in influencing the markets.
A good example of cyclical stocks is such as airlines, hotels, retails, restaurants, banks, technology, and automotive manufacturers. The companies are such as JPMorgan Chase (NYSE: JPM), Apple (NASDAQ: AAPL), General Motors (NYSE: GM), Ford (NYSE:F), Boeing (NYSE:BA), Texas Roadhouse (NASDAQ: TXRH), Caterpillar (NYSE:CAT), Brunswick (NYSE:BC), 3M (NYSE:MMM), Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN).
Risk of investing in Cyclical Stock
Investors can experience faster losses when economic conditions are worse than defensive stocks. In a prolonged recession, falling stock prices over a long period of time can put pressure on companies and investors. The company will face financial challenges over a long period of time. Therefore, wise investors need to be prudent and careful in choosing company stocks for this cyclical stock category.
Advantages of investing in Cyclical Stock
The price of cyclical stock will rise very quickly compared to defensive stock if the economy is good. Thus, investors can increase their income and profits to achieve high stock prices in a fast-paced economic market.
How to Buy Cyclical Stock
Common rule is to buy at a low price and sell when the price is high. But it is not that easy because investors find it difficult to predict low prices (support).
For some insights in determining Resistance and Support position, you can look at some examples that we made in our Technical Analysis section.
Some of the best strategies that can be used are:
Look at the economic cycle first whether it is an uptrend, downtrend, or swing.
If the economy has reached the support level, wait 3 to 6 months to make sure the economy rebounds and really on the uptrend and growing.
Then, find and buy profitable stocks in this growing market.
Measure the performance of the company's stock ensuring the signs of growth.
How to Sell Cyclical Stock
Set a price target for take profit, TP.
During an uptrend, you have many price targets that can be set depending on the level of risk of each.
For example, the target is to get 30%, 50% or 100% profit based on the stock price purchased.
Gradually sell the shareholding from time to time. For example, you buy potential stocks in large portions and allow you to hold. Then you can TP at different prices and higher based on price increase.
At the same time, monitor quarterly performance and sell according to stock strength.
While for the long term, hold and extend the shareholding if the company's performance is outperformed.