How to Use Cyclical Analysis to Trade the Right Market Sector (Part 5)

06/13/2008 12:00 am EST


John Person

CEO, John Person, Inc.

The next chart in figure 6 is Goldman Sachs (GS) and as you can see this stock is actually trading closer to it's all time highs than it is to the lows in 2003. This is a stock to watch especially as the economy improves and the overall investment landscape heals their wounds from the sub-prime mess and financial crisis.

Figure 6

There is no doubt we are in a turbulent time; Inflation may present a problem as the Fed has lowered interest rates. But at this point we want to plan ahead and prepare for signs of an impending economic expansion period or recovery and seek trading opportunities.

Currently in early 2008 we are in the late stages of a boom cycle as we see capital goods, energy and commodity prices escalate. This is inflationary and as a result eventually we can expect the Federal Reserve to stop lowering interest rates and then raise rates to combat the negative effects of inflation. Once we begin a new economic cycle we can expect the banks or financial sector and technology to lead the way. So looking at the corresponding ETFs or top relative strength stocks in those sectors may present some very top quality investment decisions.

Summary: Understanding cyclical forces on the stock market and then understanding which sectors that perform better or worse will help you to figure what areas to concentrate your interests and help you choose the right stocks or sector ETF's. This can help you not only stay on the right side of the market but also get more bang for your buck. When the economy is in an early stage recovery, by historic standards it will be more profitable to invest in the Technology and Financial sector. In late stage boom cycles that are when focusing your attention of commodities will have paid off as we have seen for the past two years. Now more than any time in trading history, investors are faced with multiple investment vehicle choices and alternatives with one of the greatest advantages being the availability of optionable ETFs. Combined with cyclical studies and specific technical analysis tools traders may be able to filter out and select higher probability trades in the years ahead. In my next article I will expand on certain technical tools and studies that will help traders uncover hidden support or value levels.

All the best to you and towards your trading endeavors in 2008 and beyond,


John Person


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