A warning from the cyclicals

Further to my post about the bond vs. stock market conundrum, here are some further warnings from the cyclicals. The first chart shows the relative performance of the cyclically sensitive Semiconductors against Technology stocks. The Semis have been weakening on a relative basis and violated a relative support level in early August.

Looking at the relative returns of the broader Morgan Stanley Cyclical Index against the market, these cyclicals fell through a relative uptrend in early June and have been going sideways against the market ever since. Stepping back, the entire formation (circled in red) looks like an inverted saucer, or dome, top to me.

This is not the stuff of robust cyclical recoveries.

In addition, we had the awful Philly Fed numbers and dismal initial jobless claims readings last week. As well, the latest Merrill Lynch survey of fund managers indicate that a whopping 78% believe that a double-dip recession is unlikely, indicating that the consensus remains bullish. The combination of sentiment readings, the message from market technicals and deteriorating market conditions leads me to a cautious stance.