I’ve covered Cramer’s tips for detecting individual stock bottoms and overall stock market mega-bottoms, but there’s one last type of stock market bottom: the Sector Rotation Bottom.
A sector rotation bottom is when an entire sector of the stock market falls out of favor and hits bottom. Like total market mega bottoms, sector rotation bottoms are cyclical, and like individual stock bottoms, sector rotation bottoms happen in good times and in bad, only they happen to different sectors at different times.
Sector rotation bottoms are often brought about by macro-economic conditions such as the Federal Reserve tightening or loosening the money supply. When the fed raises interest rates, consumers spend less, and the economy tends to slow down. As a result of the decrease in discretionary income, the kitchen counter and medicine cabinet stocks will out perform discretionary stocks. The so called kitchen counter and medicine cabinet stocks are companies like Kellogg, Proctor and Gamble, Johnson and Johnson – companies that make the products commonly found in, you guessed it, medicine cabinets and kitchens. People need these products whether the economy is good or bad.
The flip side to this is when the fed cuts interest rates, thus spurring greater borrowing and increased spending. When consumers are flush with cash, discretionary stocks do well. These are automobile manufacturers, technology and retail stocks.
The trick is to spot the point at which the cycle will change, like the flip of a switch. This is tricky because it’s essentially market timing, which doesn’t really work that well. Cramer recommends buying at the beginning of the cycle because so many people now anticipate the fed’s moves ahead of time.
If the market timing aspect makes you wary, as it does me, you may consider a modification. For instance, buy the household stocks when times are good, and hold them until times turn bad and other investors bid the price up as they pile in. This should give you larger margin for error. Or, maybe look for individual stock bottoms within an out of favor sector.
If you’re interested in more details, check out Jim Cramer’s Real Money: Sane Investing in an Insane World.
[...] Jim Cramer’s Tips for Detecting Sector Rotation Stock Bottoms I’ve covered Cramer’s tips for detecting individual stock bottoms and overall stock market mega-bottoms, but there’s one last type of stock market bottom: the Sector Rotation Bottom. A sector rotation bottom is when an entire sector of the stock market falls out of favor and hits bottom. Like total…… [...]