By far the most useful single page in Jim Cramer’s Real Money: Sane Investing in an Insane World (review, Amazon) is the “Cyclical Investing and Trading” chart on page 115.

Visually the chart looks like a W. It follows the Gross Domestic Product (GDP) growth rate through an economic cycle. The chart also depicts the Federal Reserve’s standard response of either raising (tightening) or lowering (easing) interest rates based on GDP growth. The chart has no explicit relation to time, but these cycles typically take about 7 years or so.

The meat of the chart is Cramer’s suggestions for which types of stocks (or sectors) to buy based on where we are on the chart. So where are we right now?

GDP growth has been rising over the past few years. Estimates for 2006 are in the 4-5% range1. This puts us right at the center peek in Cramer’s chart. At around 3.5% GDP growth, the chart suggests one “sell financial, housing, retailer, and auto stocks”. Just before the peek, it suggests one “buy metals and minerals stocks”. (If you track Jim’s radio or TV shows, you’ll know that this is exactly what he is advocating now.) Right after the peek (maybe 6-12 months from now), the chart suggests you “sell paper and chemical stocks”.

I hope this helps those of you out there who have been struggling with the chart. It really is a useful tool. I’m going to email Jim to see if we can post an image of it for the benefit of people who haven’t bought the book (yet).

References:
[1] GDP Growth at Two-Year High by Dan Arnall

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The new cycle begins! Thanks for pointing this out.

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I agree Jason. Loved that chart. The only question I had was how can you find out where we are on the chart? The BEA only releases its GDP data once every quarter, is that efficient enough? Can you shed any light?

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Nelson, two things. (1) Quarter data is probably good enough. We’re looking for broad trends, not day-to-day indicators. (2) I used an estimate in my analysis (see the link in the references section). Pundits will spit these out more often than once a quarter. (3 *BONUS*) I probably would have done a bit more research, but I felt backed up by Cramer’s recent comments on sector rotations.

Hope this helps.

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Big help Jason. I was wondering if monthly data would be better (since i know BLA.GOV sends out inflation data every month), but I guess quarterly works just as well. And what recent comments did Cramer make about sector rotations?? Link?

Thanks J, huge help!

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Jim has been bullish on the mineral and metals sectors on his radio and TV shows, which lines up with the pg 115 chart.

I haven’t “read” too much from him about it, but I did find this link (from April 22):

http://www.thestreet.com/_tscs/markets/activetraderupdate/10278965.html

“People are so hung up on mineral stocks and metal benders that they just don’t have enough money to buy the healthcare stocks that people are throwing away.”

You might want to start listening to his radio podcast. You can hear it live at http://www.thestreet.com or subscribe through iTunes. It’s a good way to keep track of market sentiment.

Also, you should consider this information a little dated. I think we are in the latter phases of this shift. Lately, Cramer has been saying that the tech and healthcare sectors may be bottoming out. In which case, we may see a rotation back into those stocks. (These money managers are so fickle.) The metals and minerals have some life left in them, but the majority of the gains may already have been realized.

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Hi Jason, I’ll start off by saying that I’m very new to the market and this is why I’m a little uncertain about something. I read Cramer’s book and I really liked it, but on his cyclical chart I can’t help but feel that more emphasys should have been directed towards the Fed’s control on interest rates as oppose to the GDP, which follows in accordance. Here in the forum you correlated it more towards where the GDP is, but can interest rates go any higher? that’s why i got the first impression that we’d be further down on Cramer’s chart. If you could clear this up for me it’d be great!

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actually I just read the comment you left previously lol, so i suppose that answers the question. thanks 😀

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I have a question about this chart on page 115. Sorry if it’s a silly question, but I don’t like being confused 🙂

In the chart, at around 2% on the up turn, it says sell medicine and buy “smoke stack,” just before the fed begins to tighten the rates; however, on page 109, it says “… when you think the Fed is about to become accommodative, to start slashing interest rates, that’s when you have to leave P&G and focus on the ‘smokestack’ companies…”

Please help me understand that part, because right now the chart seems to contradict the passage on page 109.

Thanks!

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Tim,

Nice catch. That does look like a contradiction. The only thing I can see revolves around the semantics of the writing:

While the chart is telling us to “buy” smokestack stocks with the first tightening, on page 109 he is saying to “focus” on smokestack stocks. So at the peak of the tightening, move even more of your portfolio into smokestacks. And then after the 4th tightening or so, sell those smokestacks.

This might be his intention.

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I guess my question lies more in the secular stocks, the drug companies and supermarkets.

Add to that the passage on page 123, when Cramer is speaking to his wife (girlfriend at the time) who drew the chart for him. She said: “when the economy is growing between 1 and 3 percent, you should own all of the Coke or Pepsi you can get. You should load up on the Pfizers and Mercks and Heinzes…”

Yet, at that exact point on the chart it’s saying “sell” medicine and supermarket stocks.

I think I understand the rest of it, but I’m still feeling a little confused on that part. 🙂

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Hi Jason,
Where are we today on the GDP Cyclical Graph? And how long does this Graph usually last before it starts over again.

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cody,
the chart is on an average of 7 years and we are right about at the top. watch for cramer to start putting a sell on paper and chemical stocks that should be coming real soon. you can look at the chart like a sine wave ( un ) it is a 360 deg. cycle and when its done it just starts over again. I would say every 1.25″ is = to 1yr.

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Cramer’s new book has an updated chart. I’ll try to post something about it soon. If you can’t wait, go to a book store and check out the last page (before the appendices).

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I have the new book and would recomend it there is a lot of good information in it.

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Jim – how do you figure we’re at or near the top? I just pulled the data from BEA and GDP has been trending down from around 4% (using fixed 2000 dollars) since early 2004. Marry that to the interest rate climb from 1.00 in late 2002 to 5.25 now and I’d say we’re between the 3% and 2% on the way down?

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i would say you are right.

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i like to see somebody else on the right track

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Where do you go to find the figures to use to find where the US economy is in this chart?

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Ok, so then we’re at the point where “slowdown is evident” and the Fed has begun to ease rates. That would be at the beginning of the curve as it’s drawn, right? I understand the call to buy banks and financials if you believe we’ve reached the bottom, but with the recent GDP numbers are we really there yet?

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…or are we at the second downturn on the “w”? Or are both downturns the same, just repeating themselves and the declining GDP in both is when he is suggesting to buy banks and financials and sell metals and minerals?

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You can’t even spell 4-letter words (it’s ‘peak’, you fool) and you expect people to take you seriously?

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So do you use the annual GDP to guide you on the chart or should you use the quarterly GDP. Quarterly GDP in 2007 is Q1 =0.6 , Q2 = 3.8, Q3 = 4.9, Q4 = 0.6 . So would you say we are close to 0% on the chart which says the cycle starts again.

Or would you use the annual GDP which is 2003 = 2.5, 2004 = 3.6, 2005 = 3.1, 2006 = 2.9, 2007 = 2.2 and say that we are at the sell “smokestack” stocks area on the chart.

Also how are we tighting interest rates when the Fed just lowered them?

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Cody, I dont see where you are pointing? On the chart, it says the Fed is easing rates, which would mean it is being lowered. I don’t see where you are talking about tightening interest rates.

Also, I have the same question he does. Are we supposed to use the quarter or year? I just read Mad Money, so this is the updated chart, and it says GDP growth (annual). Wouldnt this mean we are not supposed to use the quarterly one?

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nevermind, i see what you were talking about cody with the interest rates. and also, is the quarterly gdp used to guide as along the chart between years, so that for a whole year we arent blindly estimating where we are?

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where can I find the chart online?

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