Do you know that Stock Markets are usually about 6 to 9 months ahead of the Economic or Business cycle?
There are 4 stages in the Stock Market and Economic Cycles as follows:
Stock Market Cycle vs Economic Cycle
1. Market Bottom vs 1. Full Recession, Trough
2. Bull Market vs 2. Early Recovery, Expansion
3. Market Top vs 3. Full Recovery, Peak
4. Bear Market vs 4. Early Recession
Below is the Theoretical Model Diagram which clearly depicts the relationship between the Stock Market Cycle and Economic Cycle. (Click on the diagram to zoom out)
Diagram with courtesy of StockChart.com
It is based on Sam Stovall's S&P's Guide to Sector Rotation. It states that different sectors are stronger at different points in the economic cycle. Traders/Investors use this model to anticipate which companies will be successful in the coming stages of an economic cycle. Watching the economic conditions (ie consumer expectations, industrial production, interest rates and yield curve) might give some telltale signs as to the stage the economy might be in.
So now you know why some "Smart Money" are buying up Financials?
But remember that past performance in the stock market does not always mean future success. A particular sector may or may not perform due to other factors.
Remember what Mr Joseph Cycle said :
"We can never predict the future. But with Cycles we can anticipate the safe times and the dangerous times, the moment to take risk and the moment to conserve.The Joseph Cycle is a way to be wealthy, a method to protect wealth and a tool for survival"
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