February 26, 2015 Leave a comment
In simple terms, a bull market is a period of rising stock prices. In other words, it is the time when market conditions are favourable to owning stocks. Despite such a friendly environment, some investors fail to participate or maximize profits.
The most common mistake is to ignore the sector rhythm of a bull market. Let us explain.
Think of the rhythm of a bull market as having moods just like people. Sometimes you feel well and you want to play sports, while at other times you want to stay at home and read a book. In the same way, sometimes a bull market wants to play it safe and favour Consumer Staple stocks, while at other times it feels bold and adventurous and goes with Gold or Resource stocks. Watching the rhythm of a bull market could provide investors with valuable insights into sector and stock selection but also provide a hint about the age of the bull market.
There are three major principles:
- Every sector will get its five minutes during a bull market.
- Each bullish cycle has a leading theme, sector or area that performs the best and leads the entire bull market higher.
- Each bull market will undergo a sector rotation; while one area of the market rests, the other sector leads, and vice versa.
Keeping these principles in mind, there is a certain rhythm or sequence in which particular sectors perform at each stage of a bull market.
The first sector to show its strength is Financials. They usually bottom first and lead the advance from the bear-market lows.
Then, industrials follow. It becomes clearer that a new up-trend is underway and investors look for large, quality stocks that would benefit from improving economic conditions.
More and more investors recognize the new bullish trend and want higher returns so they turn to the Healthcare and Technology sectors.
Along with rising stock prices and an improving economy, consumers start feeling better about their prospects so investors turn toward Consumer stocks.
Finally, toward the end of a bull market, investors’ confidence becomes sky high, the appetite for risk is increasing and it is time for Resource and Energy stocks.
The final sector to come alive at the end of a bull market is Golds.
Please note that these are just guidelines and there are exceptions. For example, the sector that led the market out of the 2009 lows was Golds, most likely due to the nature of the preceding decline.
Despite these exceptions, investors who watch the sector rotation scheme during bull markets not only improve their stock selection and maximize their profits but they also get a hint about the longevity of the bull market. It is worth tuning in to the rhythm of the market.