Gavekal Capital: Two Things In Favor of Counter-Cyclicals

Monday, October 28, 2013

Two Things In Favor of Counter-Cyclicals

We divide all stocks into two baskets: 1) cyclicals, which includes consumer discretionary, industrials, materials, technology and financials; 2) counter cyclicals, which includes health care, consumer staples, telecom and utilities.  Generally the cyclical basket performs best when economic data comes in on the strong side of expectations and stocks have been in a statistical slump.  

Today, we find these conditions support counter cyclicals more than cyclicals.  First, the Citigroup Economic Surprise index has declined by 40 points over the last six weeks.


Second, stocks have been up a net +16 days, or 68% of the last 88 trading days.  As can been seen in the chart below, net positive days somewhere between 15-20 generally marks the end of the cyclical period of outperformance.