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Wall Street trader

Jason DeCrow

Cyclical stocks have been outperforming the broader stock market - not to mention more defensive stocks - during the market's rally over the past 13 months, but how long will the trend continue?

Eddy Elfenbein at Crossing Wall Street has an interesting way of looking at the trend: He takes the Morgan Stanley Cyclical Index, composed of companies whose fortunes are tied to the economic cycle, and divides it into the S&P 500.

"When we divided these two indexes, we can tell if cyclicals are outperforming or underperforming," he said on his blog. In other words, when the ratio is high, cyclical stocks are outperforming the broader index. When the ratio is low, they are underperforming.

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The ratio hit a near-term low during the stock market's bottom in March 2009, but has since rebounded to its highest level in at least 30 years, even though cyclical stock prices are still below their highs.

Can the ratio move even higher? Theoretically, yes, and Mr. Elfenbein isn't going to pick a peak. "But I'm on the lookout for a harsh drop off in the Cyclical Ratio," he said. "Once it gets going, it could down, down, down for a few years."

Be sure to check out his chart, under the headline: Where In the Cycle are We?

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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