The Australian Securities Exchange has performed better since March 2009 as compared to the last 18 months or so. And since March 2009 till September, as many as 32 stocks have grown by a staggering 128%. Now in normal times this is an amazing improvement, but if we consider the fact that the economy is still in recession, this growth becomes almost impossible to believe. However we must also take into consideration the fact that all these 32 stocks are what most people refer to as “cyclical stocks’.

What Are ‘Cyclical Stocks’?

As the name suggests, cyclical stocks are those shares that work in cycles. In other words, these stocks are more dependent on the economic movements and the current state of affairs. Whenever the economy begins to go down, the prices of these stocks begin to decline rapidly, and they are the ones that begin their sharp rise as soon as the market starts to improve. There are certain industries on which the economic conditions have a direct impact such as airlines, construction, real estate, consumer durables and others. As soon as the demand for the services and products offered by the companies in these industries begin to fall, the price of their stocks begin to slide too.

It now seems that in this recession we have already seen the worst as far as stock market prices are concerned. The highest point from where the slump began was in November 2007, and March 2009 was probably the lowest point. In these 17 months, the ASX has gone down by 50% and the cyclical stocks in the construction industry by as much as 71%.

But since March 2009, as soon as the recovery started in the ASX, these stocks have experienced dramatic growths. The average growth has been a staggering 128%. More than half the stocks in the construction industry have increased by 100% and the stock price of Boart Longyear has gone up by 537%.

Those who had picked up these cyclical stocks at the right time have made good money. But now the big question is, for how long these stocks can keep going up. The kind of improvements they have seen in recent times is of course very rare and almost surely unsustainable. So when will be escalation be checked? And more importantly, will they start falling again? Investors thus need to show restrain and not jump in blind folded.

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