The past couple of years, I've been rather firm in my belief that the deeper cyclicals would be the group to truly lead a market rally. While this group, as depicted by the Morgan Stanley Cyclical Index (CYC.X) 479.64 -1.8%, has vastly outperformed the broader market averages in the past, one thing I think a bullish equity trader needs to see is a rebound higher in this group if the NYSE Composite ($NYA.X) 499 -0.19% is going to make any type of "bold move" above its 50-day MA as recently discussed.
I'm going to say "from weakness should come strength" as it relates to the cyclicals. While we see some bullishness coming in from some various sector, the more industrial-based cyclicals are currently trading in a "wedge," both on a longer-term basis and short-term basis. With the group just sitting here right now, the likelihood of a NYSE Composite break above its 50-day MA may not be likely. Not until these cyclicals get going at least.
Morgan Stanley Cyclical Index Chart - Daily Interval
As we looked at a broader market average like the NYSE Composite ($NYA), we also look for some "key" sectors that we might expect bullishness to truly lead under the scenario of a MARKET tipping its hand toward some bullish economic forecast.
The deeper cyclicals were a bullish leader last fall and are still one of the few sectors that trade above their September lows. While we're seeing some signs of strength in the broader markets and have identified some key levels of resistance, the cyclicals as a group are still stuck in some wedges. A longer- term trend on the chart (green) is bullish, but a short-term trend (pink) bearish and intermediate-term trend (red) also bearish.
Weighing on the cyclicals today is the Forest/Paper Products Index (FPP.X) 296.20 -5.20% on continued weakness in specialty paper manufacturer Bowater (NYSE:BOW) $38.17 -7.24 after Wednesday's downgrade from Deutsche and earlier worries from Moody's placing the company's debt under review for a potential downgrade.
The "point" I'm trying to make right now is that it appears some of the "weaker" longer-term sectors are trying to play catch up, but for a real bullish move to take place and really spill over to the broader MARKET averages, I'd look for a past strong and economically sensitive industrial based group like the cyclicals to begin breaking shorter-term trends and continue its longer- term bullish trend.
This type of action really should have a trader trading 1/4 or 1/2 position on either side of the MARKET (bullish and bearish), with special attention to a stock's relative strength. Opting to focus bearish attention on poor RS stocks, and bullish attention on stronger RS charts, preferably those that are breaking above downward trends.
For ANY stock or group of stocks to move higher, it needs cash flowing into it.
One thing we're monitoring very closely on a near-term basis is for the 5-year Treasury YIELD ($FVX.X) 3.351% to break above the 3.40% YIELD level. We did see a brief piercing above this 3.4% level this morning, but quickly found buyers at that YIELD. Since that time, stocks have been rather wishy-washy and the equity MARKET really seems to be looking over its shoulder to see if some more cash will free up from Treasuries.