Cyclical Indicators Signal Potential Problems

With all attention currently on financial stocks and their exposure to a potential credit crunch and sup prime problems, the FT points out that investors should also be wary of potential problems in the cyclical sector.

Cyclical stocks are those that are aligned closely to the economy, when the economy does well so do they and vice versa. Often movements in these sectors far exceed those that would be seen in the FTE for example. Example of cyclical stocks are companies such as car makers who would typically sell few cars in a recession but lots when things are going well. By contrast non cyclical companies may include utilities companies whose output doesn’t depend on the economic environment.

While in the last few weeks financial stocks have lost value, the Morgan Stanley Cyclical index has lost an even greater amount. In addition, commodity prices also seem to be dropping with aluminium down over 7% and oil also falling.

Its been said that these falls may be caused due to hedge funds taking profits following the recent turmoil so as to cover their losses, but it is probably worth while paying attention to these cyclical indicators as these could be the sectors to watch that point to problems ahead.