Cyclical shares started underperforming the broader market in August of last year. What's interesting is that on a relative basis they never recovered.
QE2 driven demand for natural resources and rapid growth in emerging markets kept cyclicals at lofty valuations. When growth expectations moderated in August (after the end of QE2 and with the spike in Eurozone related fears), cyclicals underperformed materially.
In spite of the recent market rally however, cyclicals-to-broader-market gap continues to persist - about a 12% total return gap from 12/31/10. The market is no longer putting as high of a valuation on these shares because expectations of global growth continue to be subdued (in spite of improving economic signals in the US). That may indicate that the broader market rally may be capped by these reduced growth expectations.
|Morgan Stanley Cyclicals Index vs. the SP500 total return (Bloomberg)|