The Long-Term CYC/SPX Ratio

Last week, I pointed out that the ratio of the Morgan Stanley Cyclical Index to the S&P 500 was nearing a two-year high. On Friday, in fact, the ratio closed barely below its two-year high.

How close? On Friday, the ratio closed at 0.75670; the ratio from this past March 18th was 0.75676. It’s hard to get much closer than that.

What’s interesting is that a high ratio has traditionally meant trouble for the S&P 500. Since 1978, the entire gain of the S&P 500 has come when the Cyclical-to-S&P 500 ratio was below 0.6137 (the red line in the chart below). One-third of the time, the ratio has been above that mark, and the S&P 500 hasn’t, on net, made a dime over that time.

image1348

We’re well above 0.6137 right now but I don’t believe this is a signal that the stock market is in trouble. For one, I hardly think the ratio is a good timing device. I think this is more of a sign that the very easy gains are gone. The lesson is that cyclicals get a double-whammy effect — they outperform in strong markets, and underperform in weak ones.

Posted by on August 5th, 2013 at 3:55 pm


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