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Here’s a look at the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). For such a simple metric, I think is an often-revealing look at the market’s mentality. What it tells us is how well economically sensitive stocks are performing compared with the overall market.

About two years ago, I started warnings investors that cyclical stocks were heading towards a top. On July 19, 2007, the CYC reached its peak ratio against the S&P 500 at 0.7273. Since then, all most all kinds of stocks have down poorly but cyclical stocks have down much worse. Through Friday, the S&P 500 is down 46.4% from July 19, 2007, but the CYC is down 62.3%.

The other reason why I like to follow this ratio is that it tends to move in multi-year waves, as one would expect from looking at economic cycles. Until the ratio starts to show some improvement, I’m not going to be terribly optimistic for the broader economy. The ratio is currently around 0.51 which is still well above typical cycle lows.

Posted by edelfenbein at January 26, 2009 3:59 PM