What are Cyclical Stocks?

Unlike its global peers, most of the stocks in the PSE are cyclical in nature. When we say cyclical stocks, it generally refers to consumer discretionary companies who track the general cycles of the economy. Being a largely consumer driven nation, the composition of companies listed in the Philippines Stock Exchange draw profits from consumer spending. As such, price action of cyclical stocks will usually vary depending on how weak or strong consumer spending is which will also be directly affected by prevailing economic conditions.

Why take the time to learn this? Well after a major market crash, the economy naturally recovers and consumer spending begins to pick up. During this time, cyclical stocks are the ones who consistently align with the overall market recovery. By being able to interpret market cycles, a trader can skew the timing of his trades to be able to leverage on strong recoveries and sell on strength when the cycle shifts.

Understanding the Market Cycle

The stock market is driven by supply and demand. Human behavior will generally follow similar patterns over time in response to how supply and demand changes. During a crisis, supply is high but demand is low and as such the market drops. During an economic boom, demand is high to a point in which supply may not be able to keep up, as such, the market rallies. Over time these patterns create the so called Market Cycle in which the market regularly transition to.

Here is an illustration of a standard 4 phase Market Cycle:

Cyclical Stocks in the Philippines Stock Market

Being a consumer driven country, the Philippines Stock Exchange (PSE) is composed of a number of notable cyclical stocks. The stocks of these companies usually spike in times of strong earning reports and pull back during slow and negative earnings.

Here are some of the most notable ones according to sector:

Note that this is not the complete list of cyclical stocks and is just a curated listing of the more notable companies per sector.

Financial

• BDO

• BPI

• MBT

• SECB

• PNB

Holding

• AC

• SM

• HVN

• GTCAP

• AGI

• RRHI

• FDC

Property

• ALI

• SMPH

• FLI

• VLL

• MEG

Industrials

• AEV

• ICT

• JGS

• ANS

• MWIDE

• DMC

• HLCM

Services

1. Transportation

• PAL

• CEB

• MAC

2. Hotel and Leisure

• BLOOM

• BCOR

• LR

• WPI

• PHA

It's All About the Timing

Since cyclical stocks track the transition to each market cycle, timing is paramount. Investing in a cycle with low demand and huge institutional selling will freeze your capital and prevent you from leveraging on low risk entries. As such, you want to be buying cyclical stocks during the Accumulation and Mark-Up phases of the market cycle to score high returns in a short amount of time.

To illustrate how cyclical stocks align to the overall cycle of the index, refer to the charts below:

PSEI Weekly Chart 2004 - 2009

ALI Weekly Chart 2004 - 2009

MBT Weekly Chart 2004 - 2009

As you can see, the 2004 - 2009 period shows a clear transition of the PSEI through the 4 major market cycles. ALI and MBT alongside the other cyclical stocks also tracked the same movement that the general index has made.

This means that the index can be used in conjunction with market cycle plotting to determine major moves in price action. This way, you'll be able to plan ahead and make the necessary moves as stocks begin to show clear buy or sell signals.

How to Profit from Cyclical Stocks

Cyclical stocks can be traded both in short and medium term holding periods. Depending on your strategy, you should always refer to the overall index first to determine which market cycle it is currently in.

In the chart below, you can see how the overall index made a breakout rally from a higher base consolidation from the recent 2020 market crash. Stocks that will closely track this movement will be your index stocks (30 bluechip companies that comprise the PSEI) and cyclical stocks.

Analyzing the chart above, you can see how ALI mirrors the PSEI price action. The approach to this is fairly simple and can be synthesized in a few key steps:

1. Determine the cycle PSEI is currently in. Accumulation and Mark-Up phases are generally a good time to be heavily invested in stocks.

2. Use technical analysis to narrow down on low risk high upside entries near key support levels.

3. Buy as the price bounces from key support levels and continue to add up as it breaks out to higher base levels.

4. Sell on key resistance levels. Note that you can never predict the actual peak of a rally so it is best to sell when price action is at key resistance areas and are showing signs of institutional selling.

In A Nutshell

Trading Cyclical stocks is all about timing. You want to be heavily allocated when the economy is strong and you want to be defensive when the economy weakens. This can all be gauged through plotting the market cycles across the chart. During Accumulation and Mark-Up phases, go with cyclical stocks and plan the best point of entry to be able to ride the incoming rally.

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