After having a tremendous run, the cyclical trade is breaking down in a big way. This will most likely be the seventh day in a row that cyclical stocks have underperformed the S&P 500.
Smaller stocks have a semi-strong relationship to cyclical stocks and we saw that the Russell 2000 Index got creamed yesterday. It fell by more than 2.5%.
Here’s a look at the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (blue line, left scale), along with the Russell 2000 (^RUT) divided by the S&P 500 (black line, right scale).
The cyclicals have had a great rally for nearly two years, so some time to rest is to be expected. I don’t know yet if this is merely a pause, or if it’s the beginning of a long-term downtrend. The thing about cyclicals is that the market itself is cyclical. This means that cyclicals generally outperform a rising market and underperform a falling one. It’s a double-whammy effect.
Our Buy List doesn’t have a strong cyclical component. In fact, one of the reasons why I added Ford (F) was to beef it up. Although Ford has gotten hit the past two days, I’m still glad I added it.
Posted by Eddy on January 20th, 2011 at 12:40 pm
Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 for the last four years in a row. (more)
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