Cyclical Stocks

The value of a cyclical stocks tends to increase during economic booms and decrease during economic recessions. This happens in addition to the normal vicissitudes of a company's stock price, but can be quite dramatic in smaller companies.

Companies that are in the business of providing non-essential or luxury items to the consumer public will have cyclical stocks. When the market cycle turns down, regular consumers tighten their wallets and stop buying the things they can fairly well live without, like new cars, new houses, vacation packages, jewelry, meals at restaurants, and so on. This hurts the companies that do business in these areas, and lower profits makes their stock prices sink. When the economy rises again, as it inevitably will, cyclical stocks will rise at a faster pace than average as consumers rush to spend their excess cash on the luxury items they did without for so long. Examples of industries with cyclical stocks are the automobile, housing and travel industries, to name just a few.

In sum, when you detect an uptrend in the general economy, it's a good time to buy cyclical stocks; when the market heads south, cyclical stocks should be sold and sold short.

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