The Cyclical-Stock Party Is Ending

The stock market has had a pretty decent year so far. It's not even July 4, and the S&P 500 is already up close to 8%. Add in another 1% for dividends, and you're beating most any CD your local bank can offer.

But...

Here's the hitch: The rally hasn't treated all sectors equally. Instead, Wall Street has been heavily rewarding cyclical stocks at the expense of the rest of the market, and we're heading toward a major rotation that will affect every investor.

So if you're overweighted in cyclicals, you ought to scale back as soon as you can. As in, right now.

Let me explain what I mean by "cyclical stocks." These are your classic blue-collar plays -- stocks that are heavily dependent on the economy's ups and downs. Think of industries such as autos, chemicals, manufacturing, metals and industrials. If you see a guy with a lunchbox and hardhat steering his dino through the quarry, then yep, that's probably a cyclical.

The good folks at Morgan Stanley track 20 cyclical stocks in their price-weighted Morgan Stanley Cyclical Index (CYC). The index includes your typical cyclical plays such as Caterpillar (CAT - commentary - Cramer's Take), Deere (DE - commentary - Cramer's Take), Masco (MAS - commentary - Cramer's Take) and CSX (CSX - commentary - Cramer's Take). (For the record, I'm not sure how Citigroup (C - commentary - Cramer's Take) got in, but hey, it's not my index.)

Anyway, the boilermaker index has been on fire recently. The CYC is up over 22% this year and up over 40% in the past 11 months. Going back to the March 2003 low, the CYC has jumped 180%, which doubles the S&P 500. Not too shabby.

But the best has come recently.

This year, the CYC has already set an amazing 40 new highs. In April it burst through 1000, and it's quickly closing in on 1100. Like all good rallies, however, this must come to an end, and I'm afraid it won't be pretty.

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At the time of publication, Elfenbein had no positions in stocks mentioned, although positions may change at any time. Eddy Elfenbein runs the financial blog, CrossingWallStreet.com, and has several years of experience in the financial newsletter industry. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Elfenbein appreciates your feedback; click here to send him an email.