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Intermarket Analysis & Business Cycle Investing

David Calloway Has Had Over 100 Followers Rank: 8 Followers: 163 Votes: 114 Years Member: 1 Last Update: 22 May 2013, 7:20 Categories: ETFs
Sector / Industry Analysis
Relative Performance Charts

This chart list attempts to identify the current phase of the business cycle by comparing the relative performance of ETFs representing defined sectors of the economy to the S&P 500. Once the Business Cycle Phase has been determined, various ETFs are identified that might be expected to out-perform in the current cycle. Rotating your stock portfolio from sector to sector based on business cycle principals is one way to improve performance.

The charts are arranged in the following order, generally following the sectors monitored by this ChartList:

. . . 000 Series: Chart of the day - I occasionally highlight one or more charts from other sections of the list.
. . . 100 Series: General Overview/Background charts
. . . 200 Series: Utilities
. . . 250 Series: Financials and Home Builders
. . . 300 Series : Telecommunications
. . . 350 Series: Consumer Staples (Nondurables, NonCyclicals)
. . . 400 Series: Transportation
. . . 450 Series: Consumer Discretionary (Durables)
. . . 500 Series: Health Care
. . . 550 Series: Technology
. . . 600 Series: Industrials
. . . 650 Series: Materials
. . . 700 Series: Energy.

The business cycle is broken into the following 6 phases, as described by Martin Pring in 'The Investor's Guide to Active Asset Allocation':

. . . Stage 1: Slowing growth rates or early recession. Interest rates start to fall and bonds rally.
. . . Stage 2: Business cycle trough. Stocks begin to rally.
. . . Stage 3: Late recession and early recovery. Commodities begin to rally.
. . . Stage 4: Early recovery. Interest rates trough and bonds peak.
. . . Stage 5: Cycle peak. Stocks peak.
. . . Stage 6: Slowing growth, commodities peak.

On occasion, I highlight individual stocks in a sector. Generally, these will be stocks that Investor's Business Daily has ranked in the top-50 stocks (at least, recently, if not in the current list). IBD's rankings are based on Earnings per Share (EPS) stability/growth and Relative Strength (RS).

Less

100. Long Term/Secular Trend: SPY EMA100-EMA200 Crossovers

SPY Long Term Trend - To provide an overview of where we've been and where we are.

101: Monthly S&P 500

102: 1/Unemployment Index Correlated with S&P 500

102: Current Business Cycle Stage

103: Evidence for Current Phase of the Business Cycle

Note: Overall, the indicators imply we are most likely in Stage 2 of the current business cycle (business cycle trough, stocks begin to rally) .

If this is correct, the Financials and Home Builders sectors may be the best sectors for investment at this time.

Technology/Semiconductors may also deserve some attention as they lead during the transition out of Stage 1 and into Stages 2 and 3. However, see Chart 551. It appears we are at the current coincident peaks of the 2-yr and 6-yr technology cycles. This may temper any increase in the tech/semiconductor industry for the next 2-3 years.

104: Evidence for Particular Phases of the Business Cycle

200: Utilities Sector - Historical Absolute and Relative Performance

Note: As of 7/2/2012, IBD ranks the Utilities sector as the 2nd strongest sector in the market (Food and Beverage is the top-ranked sector). This is fairly strong evidence that we are currently in Phase 1 of the business cycle.

201: Utilities Relative to Market (XLU:$SPX) Daily

202 - Utilities Select Sector SPDR (XLU)

203 AWK - Daily Candlesticks, 1280

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