Sector Stocks for Bullish Markets

There are stocks that perform well in bear markets, stocks that perform well in bull markets, and stocks that perform well in both.  In this article, we'll focus on two main sectors and stocks that do best during bull markets.

Retail Sector Stocks

A perennial chart topper, retail sector stocks tend to perform better than other industries in bull markets.  This is due to several reasons.

First, bull markets tend to follow improvements in the economy.  As the economic picture clears and consumer confidence improves, shoppers go back to doing what they do best.  In the United States, 70% of the entire economy is made up of consumption, much of which is done at the retail level.

Another reason retail stocks tend to dominate in bull markets is because of their elastic profit margins.  In the midst of an economic recession, retail companies are forced to slash prices for popular products, even as the cost of production stands still.  This squeeze on profit margins pushes down earnings and ultimately share prices until bull markets and better economic conditions return and prices can be raised once again. 

It is not uncommon for a retailer to see their profit margins double in the short term following an economic recovery.  Most big name retailers earn less than 8% profit margins on each product they sell.  Do keep in mind, however, that the retail sector is one of the first to underperform in bear markets.  This sector can easily be bought and sold with the popular XRT exchange-traded fund.

Homebuilding Sector Stocks

Buying a home is perhaps the greatest show of confidence in the economy.  When someone goes to buy a home, they sign a contract knowing that for the next 30 years, they will have to have a source of income to pay for their monthly mortgage payment.  It shouldn't come as a surprise, then, that homebuilder stocks tend to shine in bull markets.

Helping homebuilders further along are the typically subdued borrowing costs at the very onset of a new economic recovery.  Since monetary policy in bear markets usually consists of lowering rates to spur demand, interest rates usually lag the market well into recovery, allowing consumers to purchase homes at an effective discount to their real amortized value.

Why wouldn't you purchase banks if the homebuilders do so well?  Unlike homebuilders, banks maintain exposure to one mortgage for an average of seven years, at which point they assume the borrower will either refinance, stop paying, or the mortgage will have been sold to another investor. 

The homebuilder, on the other hand, has zero exposure to the real estate and lending climate after a home is sold, and believe it or not, homebuilding continues to be one of the United States most profitable bull markets, that is.

As with all bull markets, the best performers as an asset class are the small cap stocks.  If you can, try to gain exposure to the above sectors through small cap stocks, which should rally head and shoulders above other larger names in the same sector.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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