Buying and Selling Cyclical Stocks

in Stocks

While markets can have cycles certain markets are better defined as “cyclical”. One example of a cyclical market is the “energy and production” or “E & P” market.

At the moment the price for a barrel of oil is down, significantly, from not too distant highs.

Is this movement unpredictable? No.

The question is “do you sell a cyclical stock “at the bottom”? Fool or wise?

If you sell a cyclical at or near the bottom of its stock market price slide, who is your buyer “at the bottom”? Fool or wise?

If it is wise to look for a stock buying opportunity when a market vertical takes a dive, as oil and gas stocks have recently, is it equally wise to sit tight on energy holdings when energy stocks take a wild swing down?

Traders like to trade.Volatility is their stock in trade.

E & P investors may be a bit less interested in short term swings.Therefore trading volumes may not materially increase. What you see, when you see some trading volume increases, is simply the same shares being shuffled back and forth by the swath of “red and green light” traders.

A number of oil and gas stocks have relatively small trading floats, so it’s not unlikely that, as fast as some E & P stocks have slid down, they may equally swing back up into its normal trading range (if not trajectory).

Do your homework with E & P stocks. There are sound reasons why many energy stocks are held, in large percentages, by many funds. It is unlikely that the demand for energy will be going down any time soon. There may be moments of over supply but surely as energy prices drop – as will often correspond with energy stock prices – those lower energy prices will often be met with less constrained consumption. Something like this: jet fuel prices drop -> airfare prices drop -> travel increases -> consumption of fuel increases demand -> increased demand results in higher prices.

Energy stocks may be cyclical but with a growing global population those cycles will tend to follow an upward trajectory.

That is why so many funds hold energy sector stocks. That is why many funds may see the current dip as a buying opportunity instead of the moment to sell.

YMMV.

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