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The S&P 500 (SPX.X) is about four percent lower over the last six weeks. By comparison, the Dow Jones Industrial Average ($INDU) is lower by about two percent in the same period. Given the recent weakness in the averages, it's surprising to see the breakout in shares of International Paper (NYSE:IP) today to a new 52-week high. It's a larger component of the S&P 500 with its $20 billion market cap, so one might figure that the systematic weakness of the SPX would've held the stock back.

The relative strength of the stock suggests otherwise. Shares of International Paper have been gaining relative strength versus the S&P 500 for about 18 months. Its out performance appears far from over judging by Monday's rally and breakout to a new yearly high. Today's is the first buy signal given by IP since last August.

International Paper - Weekly

Through today's trading, shares of IP have retraced 50 percent of the decline that started in early 2000. Many economists have suggested that the recession began in early 2000, especially for the cyclical concerns such as paper companies. If that was the case, then today's breakout in IP might further solidify the notion that the economy is on the mend. (Those companies most levered to the business cycle are the first to feel the impact of a weakening or improving economy; the stocks are the first to fall and rise with the economy.)

As the economy rebounds, increased profits will filter through the system, eventually reaching technology companies. But in the meantime, the companies that benefit early from a rebound in the economy are leading this market because they are the ones that will see a rebound in earnings first. IP, for example, will see an improvement in its bottom-line before Cisco Systems (NASDAQ:CSCO). That's why IP was able to lift guidance recently and Cisco wasn't able to give any. Bulls need to go where there's visibility and right now that's in the cyclicals.

Jeff Bailey
Senior Market Technician
Option Investor

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