About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, October 27, 2010

Cyclical Socks -- Relative Strength

Among the broader stock groupings, the cyclicals have been the leaders in the cyclical bull
market, with the $CYC measure of relative strength nearly doubling against the SP 500
since the market started up in 3/09. However, the relative strength line has flattened out
since April despite continuing strong sector earnings as investors ponder whether the
economy will be strong enough in 2011 to generate relative strength in earnings sufficient
to secure superior relative price action for the group. The weekly leading economic
indicators, which fell sharply from 4/10 into early Aug. have been recovering. My
monthly profits indicators are still positive, but momentum has decelerated since mid -
year. so, there is some uncertainty building about relative performance potential for the
group, although we have not seen the kind of break that would signify that investors have
begun to give up on the cyclicals. Chart.

The chart shows clearly that relative strength for the $CYC has been consolidating and
that the extended period of flatness without a new positive breakout could easily be
read as a topping process. A downward break in performance, should one occur, would
not necessarily confirm a top for the entire stock market. Rather, it might only mean that
the outlook for earnings for cyclicals is no longer so positive relative to other sectors.

This point about cyclicals is worth keeping in mind as the group could suffer badly in
relative strength if investors decide that economic recovery will be slow enough to
warrant much broader diversification and a lower exposure to very cyclically
sensitive earnings.

The ability of the cyclicals to hold up in relative strength so far in 2010 shows that
investors have been curious about the prospects for an economic "double dip"
recession, but have by no means bought off on it.

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