Cyclicals Started Falling Behind in 2012

This is a theme that we've discussed here several times: the fact that cyclical stocks started underperforming relative to consumer stocks as S&Ps have gone on to make new historic highs. But that's just been my observation. Arthur Hill over at Stockcharts.com yesterday put out a great chart that shows how big of a divergence this has really become. I had to share it with you guys.

These two indices are good for analyzing the current state of the market and economic prospects. Using a ratio chart, chartists can determine which index is outperforming and what that means for the broader market. In general, relative strength in cyclicals is positive for the market, while relative strength in consumer stocks is negative. Chart 9 shows a weekly ratio chart comparing the MS Cyclical Index ($CYC) with the MS Consumer Index ($CMR). The $CYC:CMR ratio (black line) rises when cyclicals outperform and falls when cyclicals underperform. Notice how this ratio generally rose and fell with the S&P 500 from 2003 until early 2012. Things changed in 2012 as the ratio drifted lower and the S&P 500 surged higher. This meant the S&P 500 moved higher even as cyclicals underperformed (consumer stocks outperformed). Notice how the S&P 500 exceeded its 2011 and 2007 highs, but the ratio chart peaked in March 2012 and failed to exceed this high, even with the surge over the last six weeks.

The indicator window shows the 20-week Correlation Coefficient, which measures the correlation between this ratio and the S&P 500. As expected, correlation was mostly positive from 2003 until 2012 as both moved in the same direction. There were a few dips into negative territory, but these did not last very long. Most recently, the Correlation Coefficient dipped below -.50 in May as negative correlation reached its most extreme level in over 10 years. Even though cyclicals led the market over the last five weeks, something may be out of whack on the long-term picture. Either cyclicals need to start outperforming and catch up with the S&P 500 or the S&P 500 needs to correct and move back in line with this ratio.

Great stuff as always from Arthur Hill

Source:

Market Message 6-5-13 (Stockcharts.com)

Tags: $CYC $CMR