fbpx

What to Buy When the Market’s Declining

clip_question_markThe Cheat Sheet works as a helping hand to guide investors through market cycles. If we are in a bear market, put your money here. Market’s good and going higher? Time to invest there.

The Cheat Sheet is David Sharek’s source for deciding which sectors to invest in during different segments of the economic cycle.

New and Improved Cheat Sheet

The Cheat Sheet recommends which sectors should do well during different parts of the economic cycle. Sharek has utilized The Cheat Sheet since the early 2000s. The Cheat Sheet taken apart and rebuilt in 2011, taking the segments from four to three.

The Cheat Sheet is valuable for bottom-up investing because it’s like a simple top-down flash card that tells where-to-invest-when.

What to Own with the
Stock Market Declining, Economy Steady

In this stage of The Cheat Sheet the market is falling even though the economic news is still good. Stockbrokers tell clients “it’ll be alright, the economy is fine” even as statements decline. Although people think this is the perfect time to sell, a better idea is to shift assets into areas that continue to grow in any economy.

  • Healthcare
    When the economy is tight, people still pay for healthcare. Drug companies, HMO’s, pharmacy benefit managers (PBMs) and medical devices should withstand a harsh market decline. Although this is a good place to be during a downturn, its not perfect. Deep recessions still cause people to cut back on non-needed perscriptions and surgeries that aren’t necessary, so EPS estimates can come down slightly.Healthcare starts to do well when the economy is expanding (market is thinking ahead to the economic decline) and outperforms through most of the economic downturn. In the late-stages of a recession, its good to flee Healthcare and look ahead to companies that will do better as the economy improves.
  • Food & Necessities
    People gotta eat. That’s what you should think when the economy is down. Invest in grocerie companies and drug stores — places people spend at everyday. Auto parts stores also do well because people fix their old cars instead of buying new ones. For-profit education is new to this area of the 2011 Cheat Sheet because people get laid off during tough times, then return to schoo and further their education — which they deem to be a necessity.Just like healthcare, Food & Necessity stocks get a head start at the first signs of a market decline. These do well during the recession but be quick to pull the trigger if the sexy stocks start to show strength and breakout.

What to Own with the
Stock Market Rising, Economy Declining

In the middle of The Cheat Sheet, the stock market has already dropped and the economic news is now bad. People think things are really bad, and are resistant to get back into the market. Investors throw in the towel and sell stocks. This is the time to get in, the stock market starts to rise and the best places to be are Technology and Financials.

  • Technology
    Computer and Internet companies with new and exciting products produce can deliver huge profits. Think mobile devices, and online stores. These companies could have been sizzling during the downturn, but the stock’s were held back due to market conditions. These are the companies to got get into quick when the bull market starts, because once the market gets going these stocks could soar.Tech stocks decline more than the market during a downturn, so purchase at the instance of a new bull market for best results. Once the stock market is already up and the economy turns up too, IT Outsourcers and Online Advertisers start to get money from companies that know its safe to expand. This sector is good to own until the the stock market is in a solid correction as the best tech stocks can withstand little market declines — but if the little decline turns big, these stocks can tank quickly.
  • Financial
    When the economy is down, the Federal Reserve lowers interest rates. Low interest rates drop the lending costs to banks, and banks can make more money. Brokerage firms get more orders when the stock market rises, and investment banks make money on new IPOs. Poor credit lenders are also good because the economy is about to get better.Financial stocks are good to invest in during the worst of times — this is when Financial stocks could be at their lows. Think ahead — this sector will do well eventually so buy now. Techs and Financials often start higher at the same time, but its too risky to buy techs early. Financials make their run during the first year or two of the market going higher, then their performance can get uninspiring so aggressive investors will get bored and leave.

What to Own with the
Stock Market Steady, Economy Rising

Now the economy is rising, but the best year or two of the stock market are behind us. People who sold their stocks are now comfortable to get in (they missed the boat). People are find ing jobs again and the news in the paper is good.

  • Retail & Travel
    Now its time to think ahead to what people will spend their money on. Retail & Restaurants outperform because of consumer spending but the first thing we need is new shoes — these old ones are going in the trash. Clothing & Shoe Makers do well and the headlines make these stocks easy to keep up with.Get into Retail & Travel after the Financials have made thier beginning-of-the-Bull-Market-run. The best time to buy retail stocks is when same-store sales rise. The best same-store sales figures often lead you right to the best stocks. Once we have the clothes, its time for a new car (Autos & Family Homes) and next year we will take a vacation (Travel & Hotels are late-stage investments). Get out of Retail & Travel and into Healthcare and Food & Necessities when the stock market starts to fall.
  • Energy & Commodities
    By now the economy is expanding, people are spending, companies are growing. Raw Materials & Metals are needed for new construction and brand new cars. All this prosperity requires more power. Mining Equipment is used to get the coal, which is burned to create electricity. Oil goes up from higher demand so Oil & Oil Drillers rise. Now that oil is up, newer (more expensive) Clean Energy gets talked up. Think green.Energy & Commodities is the last stop of the economic cycle. The Cheat Sheet stops here. This is the place to be after Technology and Financials have gone up, and get in when Retail & Travel is hot. High energy prices can lead to inflation and either can derail the economy and start the cycle over. This sector is good when inflation is high because these companies are the ones raising prices and profiting from it.

Leave a Comment

Your email address will not be published. Required fields are marked *

Not a member? Sign up here for $25 a month.