The Cyclicals Have Led the Charge

One thing to point out about this rally is that it’s been hugely led by cyclicals. Since March 9, the S&P 500 is up 34% but the Morgan Stanley Cyclical Index (^CYC) is up a stunning 98%. That’s a huge move for an index. Cyclicals have outperformed the market for 19 of the last 23 sessions.
Too many analysts like to downplay a rally because it’s slanted one way or the other. But almost all rallies are initially geared toward one sector or another — and just because it starts that way doesn’t mean it will end up that way. Broad-based rallied are far more the exception than the rule.
I like to follow the ratio of the CYC to the S&P 500 because it tends to move in long-term cycles (hence the name cyclicals). See the chart below, and note how dramatic the move has been over the last six months.

I’ll warn you not to mistake this for a market-timing device. Instead, it’s a way to get a look at the internals of the market. I think the broader rally still has legs but I’m beginning to doubt that the cyclicals will continue their lead. They’ve earned a nice rest for now.
P.S. The ratio reached its peak on July 19, 2007 at 0.7273. One month before, I warned investors that the cyclical party was coming to an end.

Posted by Eddy Elfenbein on May 5th, 2009 at 8:10 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.