Loc,  The business cycle causes certain groups of stocks to move in a somewhat predictable pattern through the business cycle.  Lots of different analysts follow this and post charts on what groups should benefit during the part of the business cycle we are in.  Even Jim Cramer talks about the business cycle and how it effects stocks and has charts in his books tell us what should be moving when.  William O’Neil references the business cycle to help us understand what is going on, so we know what part of the bull market cycle we are in.

A couple things to understand… First.  The market is a leading indicator and “moves” before the business cycle. And Second.  No two cycles are the same.  They are similar, but not the same.

In the simplest form:  Before the economy comes out of recession early leading groups lead the market.  These would be banks and building groups.  Then as the economy turns and picks up steam technology and chemicals and electronics start to lead.  Then as the economy really heats up, metals, transportation, steel, leisure and other cyclicals start to lead.  And then as the economy tanks, defensive groups and medical groups lead.  If you think about it, it is pretty intuitive how this works.  Banks move first while we are in a recession because the interest rate is coming down and they can be more profitable.  Then as the economy picks up steam consumers and business start buying electronics and technology.  As the consumer and business become more flush with money they start traveling and buying things they do not buy when things are bad.  And then as things fall apart at the end of the run people get defensive.  They always buy food and alcohol and medicine.  Hence the defensive groups lead in the bad times.  Many books have been written to explain these few paragraphs I have written here……

I hope I have helped.  Google business cycles and you will find lots and lots of information about how they effect the stock market.  And remember, not all cycles are the same, they last with different durations and sometime take some strange twists. So it might not happen the way I have shown above.  Example, energy groups are thought of by some as “early movers” and that makes sense, as the economy improves more energy is purchased helping the profits of the energy companies causing their stock to rise. However, that is exactly opposite of what is happening today.  We are defiantly toward the end of the cycle and energy stocks are booming!  Remember energy and Utilities are different groups and move for different reasons…  Hope this helps.  

Remember, the hedge funds and the institutions understand the business cycle.  Therefore they move money in advance of it hoping to capitalize on the move.  Don

Loc, Just one more comment….. No one can predict or answerer the questions you are posing.  No one has a crystal ball.  However one can sure make an educated guess about what is going on!  Don

According to the Mayans you should get very bearish in December 2012. Hollywood even made a movie about with John Cusack in a leading role, so you know it has to be true.

Personally, I'll be long canned food, ammo and underground survival shelters.

;-)

Don/Lon,

Very nice responses. A pleasure to read.

See, when you know these things, it's expected and when it hits, you're not in any irrational thought mode.

Merely clicking along with what the market tells us. Kind of makes it more like play doesn't it ?

-Tom

Great commentary Don! Brad

What I find faxcinating is that the Transports have recovered all of their losses since 2007 and even went on to make a new high rising 166% from the March lows.  The RTH and XRT have also made new highs.  China is now the second largest consumer of Luxury goods in the world.  It is the largest auto market in the world.  So I would conclude that these indexes made new highs because the companies  have a higher component of emerging market sales.  This is not a normal business cycle because there is no money velocity from the Fed's monetary easing.  What foreign central banks are doing is far more important then Federal Reserve action.  And many yield curves around the world have inverted, a dangerous sign.  But why be concerned about the business cycle?  I would just look at the stocks in your portfolio and follow buy and sell rules and let that be your guide.

Tucsontrader,  Following the business cycle helps to determine the overall health of the market.  This reason alone is reason enough to stay aware of the cycle.  Even in HTMMIS, the business cycle is referenced for this very reason… To know what stage of the game we are in.  Early in the game one might be a little more flexible or less quick to sell a stock.  But, late in the game….. If you want to keep your hard earned gains, one might need to be much quicker on the trigger to sell.  Just my opinion!  Don

Check  this blog:

taharmjigal.wordpress.com

- TM

does anyone have an opinion on what stage we are in right now?

Imbiton,   I keep an Industry Group spreadsheet and follow the groups every week end.  The spreadsheet tells me that there is a struggle between Phase Four, Contraction, and Phase One, Early Expansion.  That is what my spreadsheet is telling me by the way I have classified industry groups.  So it is just my opinion…. Everyone is entitled to an opinion.  Now what is interesting is the defensive groups such as Utilities and others clearly showed the bottom of the market back in March 2009 in my spreadsheet.  If you remember we were off to the races starting in middle March 2009.  What my spreadsheet is telling me right now, if the groups move the same way as they did back then, the market is not out of the woods yet and could suffer further pain on the coming months.

So again my opinion is: The “market cycle” is stuck between Phase Four Contraction and Phase One, Early Expansion.  The investor needs to remember that the market cycle leads the business cycle anywhere from 6 to 9 months.  Don

Imbiton,   In another opinion, I am a member of the Naperville meetup group that meets in Naperville, just outside of Chicago.  They had a gentleman present at their November Meetup from Global Macro Partners who presented a very convincing presentation that he felt we were in Late Phase One, Early Expansion, if not already into Phase Two, Expansion.  (Now I 100% disagree with him.  But that is my opinion!  And that is why the market is so difficult… Because no one really knows till it happens.)  I believe his name was Glenn Cackovic.  I suggest you join a local meetup group in your area and also join the Naperville Meetup group outside of Chicago.  They put their monthly meetup on the web.  It is very good stuff!   Don

Imbiton,   In another opinion, I am a member of the Naperville meetup group that meets in Naperville, just outside of Chicago.  They had a gentleman present at their November Meetup from Global Macro Partners who presented a very convincing presentation that he felt we were in Late Phase One, Early Expansion, if not already into Phase Two, Expansion.  (Now I 100% disagree with him.  But that is my opinion!  And that is why the market is so difficult… Because no one really knows till it happens.)  I believe his name was Glenn Cackovic.  I suggest you join a local meetup group in your area and also join the Naperville Meetup group outside of Chicago.  They put their monthly meetup on the web.  It is very good stuff!   Don

Don - would you be willing to share your spreadsheet? I would like to see and maintain for my own records. If you prefer not to share, can you spell out how you put it together? Thanks in advance.

Lon

Lon,

Send me your email address.

Mine is dthomas240@aol.com

Don - sent you an email.

I would highly recommend the Naperville Meetup group.  I have been a memeber for several years and have learned a lot!   Katrina, Orlando, Florida