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Over the summer, I had several posts about how the outperformance of cyclical stocks was soon going to end. I particularly looked at how the Morgan Stanley Cyclical Index (^CYC) was doing relative to the S&P 500 (^SPX)

Here’s part of a column I wrote for Real Money five months ago.

The boilermaker index has been on fire recently. The CYC is up over 22% this year and up over 40% in the past 11 months. Going back to the March 2003 low, the CYC has jumped 180%, which doubles the S&P 500. Not too shabby.

But the best has come recently.

This year, the CYC has already set an amazing 40 new highs. In April it burst through 1000, and it's quickly closing in on 1100. Like all good rallies, however, this must come to an end, and I'm afraid it won't be pretty.

The important thing to remember is that cyclical stocks are…well, cyclical. They move up, and they move down. Personally, I like the "up" part the best. Historically, each cycle has lasted around five to seven years, so the clock is running out on this latest cycle, which began in September 2000 just as the tech sector was returning from its romp through Bubblestan.

Another important fact to remember is that cyclicals have a nice habit of outperforming the stock market when the market itself is doing well but underperforming when stocks take a beating.

The end finally came on July 19. Since then, the CYC is down -13.4% while the S&P 500 is down just -6.6%.

I think the underperformance will continue for a few years.

Posted by edelfenbein at November 15, 2007 4:31 PM