Cyclicals Are Soaring

Cyclical stocks have been red-hot lately. The Morgan Stanley Cyclical Index (^CYC) has beaten the S&P 500 for the last seven straight days, and 25 of the last 30. This may be a sign that the economy isn’t ready to throw in the towel just yet.
The cyclical rally is notable because the sell-off last May and June fell disproportionately on cyclicals. Still, cyclicals have been the uncrowned kings of this bull market. In less than four years, the CYC is up over 150%, which is nearly twice as much as the S&P 500.
I like to track the CYC/S&P ratio, which often gives us a better reading on the economy’s health than any government report. The ratio increases when cyclicals outperform, and decreases when cyclicals underperform. On May 10, the ratio got to 0.672, its highest point in 12 years. The correction brought it back below to 0.610, but now it’s closing in on the May high again. Yesterday, the ratio got to 0.665.
The ratio’s high mark of 0.677 came on March 23, 1994 (my records date back to 1978), so we’re in striking distance of a new high. During previous economic recoveries, the ratio has usually petered out around 0.65. Currently, the ratio is in the top 1% of all readings. In other words, we’re near outlier territory.
While cyclicals are surging now, history suggests that the end of the party may soon be near.

Posted by Eddy Elfenbein on February 21st, 2007 at 8:52 am

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