More Signs Of An Overheated Market

by: Eddy Elfenbein

Eddy Elfenbein submits: Here’s another sign of an overheated market. The late-stage cyclical stocks are starting to outperform early-stage cyclicals.

Here’s a graph of the Merrill Lynch Late Cyclical Index (^XT), the gold line, with the Merrill Lynch Early Cyclical Index (^XE), the black. Notice how closely this indexes tend to track each other. But recently, the late-stage cyclical stocks have jumped higher while the early-stage stocks are bouncing along.

The XE is comprised of stocks that do well once the economy starts to show some life. These tend to be more consumer-oriented stocks. In fact, Wal-Mart is about 30% of the index. The index also inlcudes names like Lowe's, Home Depot, Costco and Target.

The XT is made up of stocks that do well when the economic cycle starts to show its age. These are mostly heavy-industry and commodity stocks like Dupont, Dow Chemical, Alcoa, Phelps Dodge and Nucor.

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