I remember when I first arrived in Oregon, during the fall.
The leaves were bright orange and falling everywhere. The weather was cool. And there always seemed to be a nice breeze blowing.
Believe it or not, this was the first time I had experienced fall. Up until then, I lived in South Florida. That place only has two seasons – wet and dry. Fall, winter, and spring barely exist when you’re that close to the equator.
But anyone who has lived further north than Georgia knows exactly what the four seasons are like. And every year, the weather shifts through all four just like clockwork.
Farmers have come to rely on it. Kids have come to love it (especially those long summer days). And most Americans have grown accustomed to fall.
So why am I talking about the seasons? Because they are a cycle. I love cycles because they can be found everywhere and are predictable.
You find cycles in investing, too. And if you learn how to spot and use them, you stand to make a good deal of money.
So today I’m going to show you one of my favorite cycles… and detail how you can use it to make some cash.
Boom and Bust, Like Clockwork
If you’ve been alive for more than 10 years, you’ve experienced good economic times, and bad ones.
They happen no matter what. And (so far) nobody has figured out a way to make them stop.
Sure the government has tried to stop the “bust” from happening. But it has never succeeded (it usually makes things worse!). So instead of trying to fight the bust, I’m going to show you how to take advantage of both the boom and the bust.
Just take a look at the chart below…
What this chart does is line up a bull and bear market cycle, alongside the economic cycle.
The first thing you’ll notice is that a bull market usually starts before the economy perks up. Why? Because usually the stock market is forward looking – investors are anticipating when the economy might improve, and buying stocks deemed as a “value.”
This happened in March of 2009. At the time, the economy was in a major bust cycle. But stock prices were so cheap that investors started snatching them up. The S&P 500 went on to rally nearly 100% until now.
Likewise, the market usually starts to go down before the economy enters a bust cycle. Again, this happens because investors are always trying to anticipate what’s next.
Take for example the sell-off we saw in August. Folks were selling stocks because they feared that the economy was about to enter into a recession.
But did it? Nope. And since then, stocks have begun to recover.
Now, while the two things I mentioned highlight’s what happens to the market during the first part of a boom and bust cycle, the real meat is in the middle.
Refer back to the chart above, and you’ll notice that at different points of the economic cycle, certain sectors do better than others.
For example, at the very start of a bull market, the best sectors to buy into are financials and transportation stocks. This is because banks start to lend more once the economy begins to expand, and that credit loosens up credit for car buyers.
Then, as a bear market starts, the best two sectors to buy into are consumer goods and healthcare stocks. The fact is, people will always get sick and go to the doctor. So healthcare stocks usually never see the kind of shrinking growth that other companies do in a recession.
Also, consumers always buy soap, toilet paper, and basic groceries, no matter how bad the economy is doing. So this tends to shelter consumer goods stocks from the downturn as well.
So where are we now? Well, that depends on where you think the economy is heading.
Considering how badly Europe is doing, and how the global economy is contracting, I suspect that the U.S. could enter a bust cycle as soon as next year. That means that right now, investors should be buying consumer goods stocks and healthcare related stocks.
Already, these two sectors have done extremely well.
Take drug company Eli Lilly (LLY). When investors took the S&P 500 down nearly 20% from August to September, Eli Lilly actually dropped by only 15%. But more important is the yearly performance.
The S&P 500 is down 0.2% this year. But Eli Lilly is up 17.18% this year. In fact, the company just hit a new 52-week high!
That’s not the only health related company outperforming the S&P. Astra Zeneca (AZN), Pfizer (PFE), Abbott Laboratories (ABT) and Johnson and Johnson (JNJ) are all outperforming the S&P.
And consumer goods stocks are doing great, too. For example, Kraft (KFT) is up 20% this year.
So as you can see, there is definitely a cycle that can pinpoint what kind of stocks will do well, no matter where we are in the economic cycle.
And by simply looking at the chart I showed you today, you can gain an advantage to beat the market and make some cash, too.
So what do you think – are there cycles in the stock market, and can you use them to make a bunch of money? Or have you already used some of these cycles with great results? Share your thoughts below.