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One Way To Approach A Cyclical Stocks Rebound

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One Way To Approach A Cyclical Stocks Rebound

Predictably, cyclical sectors, namely technology, but a few others as well have been adversely affected by the U.S. trade war with China. That makes sense because, among S&P 500 sectors, technology derives the largest percentage of its revenue in international markets.

What Happened

An apparent thaw in trade tensions emerged Tuesday as the U.S. Trade Representative (USTR) said the U.S. will hold off on adding new tariffs on Chinese imports. Those tariffs were supposed to go into effect in early September, but have been pushed back until mid-December.

“Further, as part of USTR’s public comment and hearing process, it was determined that the tariff should be delayed to December 15 for certain article,” said the USTR. “Products in this group include, for example, cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing.”

Why It's Important

One day does not make or break a trend, but it's possible that cyclical sectors are poised to bounce back and that could spell opportunity with the Direxion MSCI USA Cyclicals Over Defensives ETF (NYSE: RWCD), an exchange-traded fund designed to take advantage of cyclicals' strength over stodgy defensive sectors.

RWCD tracks the MSCI USA Cyclical Sectors – USA Defensive Sectors 150/50 Return Spread Index, which has 150% long exposure to cyclical sectors and 50% short exposures to defensives to arrive at 100% net long exposure. Of that 150%, about 115% is allocated to the technology, consumer discretionary, financial services and communication services sectors, according to issuer data.

“We do think that the economic growth picture is going to improve, the earnings picture is going to be quite strong and this is a compelling way of exposure to that in one ETF as opposed to building it yourself,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in an interview with CNBC.

What's Next

While ebbing in trade tensions and still firm economic data bode well for cyclical stocks, another catalyst could favor high beta fare.

That catalyst is rising valuations on defensive sectors that investors have recently been flocking to. In fact, data indicate groups like utilities and real estates are becoming pricey relative to historical norms, a scenario that often leads to some near-term weakness in those sectors.

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