Cyclicals Continue to Lag

I’ve warned investors that cyclical stocks are poised for a period of under-performing the market. These are stocks whose business fortune is more closely tied to the ups and downs of the economy.

The shorthand I like to use in following the cyclical sector is the ratio of the Morgan Stanley Cyclical Index (^CYC) to the S&P 500. That ratio reached an all-time high on February 11th and has gradually dropped ever since. Since the beginning of July, the ratio has really started to head south. From July 1st to July 26th, the S&P 500 is down just 0.58% while the cyclicals are off by 4.73%.

On Friday we’re going to get our first peek at how well the economy did during the second three months of the year. The report will most likely be depressing. While the economy is indeed growing, it’s not growing at the speed needed to put people back to work. As long as the economy remains sluggish, cyclical stocks will continue to do poorly. Outside of a few exceptions, I urge investors to steer clear of cyclicals.

Posted by on July 26th, 2011 at 10:24 pm

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