cyclical stocks

Money continues to rotate in the stock market as we continue to see a scaling back and downsizing of big cap tech/growth positions and a push into the more beaten up sectors like travel, leisure, and cyclical stocks. Remember, cyclical stocks and their companies tend to have a direct relationship to the economy. 

What are cyclical stocks?

When the economy grows, prices for cyclical stocks tend to go up. Cyclical stocks represent companies that make or sell discretionary items and services that are in demand when the economy is doing well.

They tend to include restaurants, hotel chains, airlines, high-end clothing retailers, auto manufacturers, etc… So it’s not that the big cap tech is doing bad but rather we are simply seeing a rotation of investing dollars out of stocks that have had a massive run higher and into the stocks that have been beaten up but might now show a big rebound when the consumer comes back into a more wide-open economy.

The big question is how long will money flow in that type of direction?

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Fundamental Analysis

Some Wall Street insiders argue that big cap tech could remain out of favor until the economy fully restarts, gets back on its feet, we move back closer to full employment, and the Fed starts to give off a more hawkish vibe. Fed officials have been very outspoken in their belief that prices may be higher for some things as we first ramp back up the economy but persistent inflation is not seen as a threat, particularly with unemployment numbers still so high.

Adding to investor anxieties on the inflation debate is the fact that longer-term interest rates continue to push higher. Fed Chair Jerome Powell didn’t have much luck calming the market or taking away the inflationary worries during his question-and-answer session but he really only repeated what the Fed has said for months – that the central bank will maintain low-interest rates and its bond purchases while also keeping inflation in check. 

Wall Street investors are wanting to hear more specifics on how the bank plans to keep long-term borrowing rates from pushing higher and inflation from running hot. Perhaps one curveball delivered last week that made inflationary concerns even worse was the surprise decision from OPEC to keep output “unchanged” which pushed crude oil prices higher. Keep in mind, some energy market insiders had been forecasting a +1 million barrel per day increase coming down the pike.

Data to watch next week

Next week brings updates for two key inflationary metrics with the Consumer Price Index on Wednesday and the Producer Price Index on Friday. Headline CPI climbed in both December and January. However, core CPI, which strips out food and energy was unchanged during both months.

Investors also continue to monitor the U.S. vaccination campaign that seems to be gathering good momentum. The country is now on track to supply enough doses to every adult that wants one by May. From what I understand, the U.S. is now vaccinating an average of +2 million people a day, up from 1.3 million in early February, and steadily moving higher.

cyclical stocks

SP500 technical analysis

As we previously discussed there is no clear direction based on cycles, seasonals, and Advance Decline Line. Nothing changed yet. However, we have 2 interesting ranges to watch. Breaking and holding below 3720 will signal a deeper pullback in SP500. At the same time, if the price sustains above 3935, we can expect a new wave to the upside. 

After the Senate passed a $1.9 trillion coronavirus relief package on Saturday I will not be surprised to see a gap up or short-term rally in SP500. Overall, till the price continues to trade in the neutral range 3720 – 3935, we can stick to day trading. Personally, I use Gann levels to identify sell and buy points on an intraday basis.

Are cyclical stocks the next best asset? SP500 forecast by Inna Rosputnia

Wishing you a great week!

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