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Cyclicals play an important role in economy

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I still feel that many of the deep cyclical stocks play an important role in understanding economic strength/weakness for the US economy and traders and investors should be monitoring how this group of stocks as measured by the Morgan Stanley Cyclical Index (CYC.X) is trading. In early May, I felt a break of downward trend to the upside would be a good sign for the markets longer term and recent trading tells me that something is about to break big time. A move above the 550 would be a HUGE positive in my mind. Not only as it relates to the stocks in this index, but the broader US economy as well.

Cyclical Index - last eleven months

Late last year I thought the upward move in many of the deep cyclicals was an early sign that the MARKET was beginning to show some hope for the future. If we believe that it is big companies like those found in the deep cyclical industries that control big information technology budgets, then this is a group of stocks that bullish traders wants to see do well. The MARKET buys stocks it feels will outperform other groups of stocks and once they get the performance out of a specific group it will then rotate to the next group of stocks that will ride the wave higher. For technology stocks to have hope, I think the deep cyclicals need to show another strong leg higher. My thinking is that BIG earnings from the group would show up when the index itself is trading up in the 650-700 range. Once the good news hits the market, that's when institutions will sell into the strength of earnings in the group and then rotate all those profits into technology stocks. That's about the same time the big information technology budgets at the above cyclical companies start getting spent.

The stock symbols that comprise the Morgan Stanley Cyclical Index (CYC.X) are AA, ALD, CAT, CHA, C, CSX, DCN, DE, DOW, ETN, FDX, F, GP, GT, HWP, HON, IR, IP, KRI, MAS, MOT, PD, PPG, R, S, TEN, UK, UTX, X and WHR.

Jeff Bailey
Senior Market Technician

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