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Monday, May 16, 2005
Market Recap
The market rallied today with a very nice gain. The DOW had a triple digit gain with a 112 point advance. The NASDAQ gained 17 points and the S&P was up 9 points. This rally seems good on the surface but volume was certainly questionable at best, especially for a Monday. The PPI will be released tomorrow before the bell and the CPI will be released on Wednesday morning. These two numbers will most likely move the market. The NASDAQ continues to look very strong with the rotation into tech continuing however, the 200 SMA for this index is 1995 as of tonight, and the NASDAQ closed just below that today at 1994. It will be interesting to see if the NASDAQ can close above this critical level after the PPI news tomorrow. If it can, that will be great news for tech stocks, but not so great for the industrial companies on our short list. With any luck, we could have it both ways soon, with tech stocks going up and selling coming into the big smoke stack stocks.
Cyclical vs. Non-Cyclical Stocks
We cannot control the cycles of the economy but we can adjust our trading to the cycle. Adjusting to economic transitions requires an understanding of how each industry develops in their relationship to the economy. It is important for us to know the difference between cyclical and non-cyclical companies so that we can distinguish between the sectors that are affected by economic changes and those that are more defensive in nature. Tonight we will look at the industries within these two categories and identify where we can trade both long and short, to take advantage of this economic swing in the cycle. If the economy starts to decline, we certainly can profit by shorting the cyclical stocks. Remember, the stock market has the uncanny ability to forecast the economy six months out. By the looks of some of the cyclical stocks on our bulletin short watch list, the economy is headed for a fall. We have advanced notice of this just by the way these cyclical stocks are acting right now.
Economic Slowdown
Non-cyclical stocks repeatedly outperform the market when economic growth slows, while cyclical companies are highly correlated to the economy. The non-cyclical companies, also called “defensive stocks”, will profit regardless of economic gyrations because they produce or distribute goods and services that we always need: food, power, water and so on. The sales of companies with cyclical products, on the other hand, depend on whether or not the economy is strong; sales will thrive when people have extra income to spend on luxuries, and they will decline when the economy slumps. If you believe the Federal Reserve is on a mission to slow down the economy, then defensive stocks are where you should have your money and you should be shorting the cyclical stocks.
Examples
The difference between cyclical and non-cyclical industries is simply the difference between necessity and luxury. There are certain items we cannot live without and would not cut back on, even when times are tough. The stocks of companies producing these items are non-cyclical and are not hurt by the effects of an economic downturn.
Cyclical items are new cars, fancy restaurants, high end jewelry, boats, RV's and the travel industry (cruise lines, casinos, airlines, hotels). These are the sectors that produce things we can live without when money is tight. Other examples of cyclical industries are manufacturing and construction. These are the types of industries and stocks that you want to avoid being long, when the economy slows. More aggressive traders would short these stocks during this slow period.
Utilities
An excellent example of a non-cyclical industry is utilities. These stocks can help investors avoid losses when highly cyclical stocks are getting crushed. For instance, a well timed rotation out of CAT and into a utility stock is the type of maneuver that the “smart money” has used for years during economic downturns. If times get tough, new money for building projects slow and therefore construction companies would not purchase heavy machinery. But no matter what, our top priority will always be to have power and heat for our homes. By providing a service that is consistently used, utility companies grow conservatively and do not fluctuate dramatically. However, this safety is a slow return on your money and when the economy sees some growth again, these stocks will lag immensely.
Non-Durables
Companies such as PG, CLX, MO and G are all attractive investment choices when the economy is in the dumps. Remember, you pay for safety in that the stocks are slow movers but at least they would not fall off the cliff as some cyclical stocks are doing now and while you wait for the market to turn around, you collect a nice dividend.
Summary
Predicting economic cycles is not within the scope of this service but realizing that different industries respond differently to economic fluctuations can help us stay on the right side of the trade. When the economy cools off, the cyclical companies will be hit the hardest, those are the ones we have been exploiting and taking short positions in. If you cannot short stocks, you should try to find the stable companies that produce things you cannot live without. Those stocks should hold up during a bear market.
”My Notes”
We would like to introduce a new feature on the website, “My Notes”. This link is located in the top right corner. It is an area where you can store notes for yourself in an organized manner. Just click on this link and a note pad will come up, allowing you to save any trading notes you may have. I use this feature myself and it is quite handy. A big thanks to Mike Tojo, our webmaster for creating this tool.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Please Tell A Friend
Please tell a friend about our service. As always, thank you for your support past, present and future!
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
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