I’ve been talking about the dangers in owning cyclical stocks and the breakdown is finally happening. Below is a chart of the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500. When the line is rising, cyclicals are outperforming. When it’s falling, cyclicals are trailing.
The ratio had an explosive rally beginning in March 2009 and it reached an all-time high on of 0.8441 January 10, 2011 before pulling back. The ratio rallied again and just barely made a new all-time high on February 11 of 0.8442. The new high was made by slightly more than one-ten-thousandth of a point.
In mid-February, cyclicals pulled back sharply then tried one more rally in March. Ultimately, the ratio failed to make a new high. But only in the last week have cyclicals started to fall apart.
The cyclicals have now trailed the S&P 500 for five straight days and yesterday was the worst day relative to the rest of the market in more than two-and-a-half months. While the S&P 500 lost just 0.04% yesterday, the CYC lost 1.51%. I think we’re in for a multi-year period of cyclical underperformance.
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