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Deep Cyclicals respond to Fed cut

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I think it is so important for traders and investors to monitor different sectors and understand what the MARKET is saying by the way they perform. Back in October I had laid out a scenario for a strong economy in the future to be supported by the cyclical stocks doing well. Things were looking great until March when the Morgan Stanley Cyclical Index (CYX.X) ran into a long-term downward trend at 558. When that happened the CYC.X traded lower. We put a retracement bracket on the index and the 61.8% level held at 470 and since then, the CYC.X has recovered nicely. Now we need to monitor things again and begin testing what takes place. I've felt for sometime that this group of stocks needs to do well for even the "techiest" of technology stocks to be doing well in the future. These deep cyclicals are the ones with big IT (information technology) budgets.

Morgan Stanley Cyclical Index (CYC.X) Chart - last eleven months

One index that I keep an eye on as it relates to longer-term health of the economy is the CYC.X. In March, the CYC.X actually rallied right up to our downward trend (I didn't attach this trend to that high on the above chart). The MARKET was watching that trend and decided to sell and sell hard. Now, we need to monitor things once again. Will the MARKET sell and sell hard or is the MARKET beginning to view things differently? I don't know the answer (lack of crystal ball) but the supply/demand charts say this index has a lot of potential. If that's the case, then the economy also has the same potential as far as I'm concerned. The CYC.X has a major test coming in the 550 to 560 range.

Jeff Bailey
Senior Market Technician

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