Another Down Friday

The market is down again on a Friday which has been the trend this year. And once again, the cyclical stocks are leading us lower.
Every so often I like to look at ratio of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500. This is a quick-and-dirty way of telling us where we are—or at least where the market thinks we are—in the economic cycle.
As you might expect, this ratio often moves in a cycle. Cyclical stocks tend to lead the market up out of a recession and conversely, lead us lower at the beginning of a recession.
I’ve said before that cyclical stocks, as a whole, probably aren’t a good place to be right now. This graph of the ratio shows how elevated the ratio is:

You can also see how dramatic the ninth-month period was from September 2008 to August 2009. The ratio closed at an all-time high of 0.803 on April 26 of this year, exactly one session after the market’s highest close in nearly two years. Since then, the S&P 500 has given back about 12% while the CYC is off by more than 16.5%. Although I think the broad market will recover, I still believe that cyclical stocks will be laggards.

Posted by Eddy Elfenbein on August 20th, 2010 at 1:02 pm

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