Sector Rotation for Dummies
Posted by ~Ray @ 2007-10-11 05:44:53
Investing can be confusing. Luckily. Cramer has mapped out some road rules for all you Home Gamers trying to navigate the jungle that is Wall Street. Think of it as "Mad Money 101" –- some fundamental advice to keep in mind as you play the market. Whether you're a first time investor or a seasoned financier it's always good to bequeath the basics.
Spotting a sector rotation when money moves from one sector or assort of sectors into another because of the business cycle is of the utmost importance. Cramer said. As far as he's concerned it’s one of the key moves investors be to spot before it happens if they be to make money in the merchandise.
Fifty percent of how a stock moves depends upon the performance of the sector it's in. Cramer said. So if investors can call the sector they can call half the gains or losses in a given stock. Why is this true? Because most of the big fund managers are committed to sector-based thinking and they're the buyers and sellers who set prices.
There are two kinds of companies out there. Cyclical businesses do well when the economy is growing abstain when the Fed has rates low but they don't do so well when the economy slows down. Cramer said. These are the airlines autos raw materials consumer durables and heavy equipment stocks.
Secular stocks aren't sensitive to the underlying strength or weakness of the economy. General Mills
or any of the utilities. They won't be affected by the cycle because populate don't forbid buying Band-Aids just because they're low on change.
Here's how to compete the cycles: At the top of the cycle before a downturn is coming maybe because the Fed is raising rates load up on your secular stocks. Cramer said. At the furnish swap out of all that for some beaten up cyclicals. In a nutshell: When the economy is humming along with high growth change cyclicals and buy secular stocks. When GDP growth is in the gutter but it looks like it’s done going drink that’s the measure to load up on cyclicals.
The cerebrate this is actually difficult is that it's very counter-intuitive. Cramer said. When cyclical stocks start to bottom everyone cuts the earnings estimates for them. Remember this is the bottom of the cycle so the companies are suffering. The estimates get slashed but the affiliate has hit furnish. It probably won't go much displace. That makes these stocks be expensive because it's not the price that matters the price-to-earnings multiple does. When these companies are at their most "expensive" at the bottom of the cycle. Cramer recommends buying. Why? Because the companies' earnings are going to change magnitude as the economy picks up and investors will never be able to buy them so low after the market gains a little traction.
furnish Line: Play defense buy secular stocks at the top of the cycle and go on offense with cyclicals when the economy is so bad that people need to take away the tie and the shoelaces.[ADVERTHERE]Related article:
http://www.cnbc.com/id/20495000?__source=RSS%7Ctag%7C&par=RSS
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