“We believe Wednesday’s 2.3% sell-off feels of capitulation and confirms summer weakness would be “front-end loaded.” Thus, we now see the big call is “Summer of Cyclicals” (Buy them), with 4 reasons: #1: Cyclicals have underperformed Defensives by 1,160bp since 2/16/11, matching the 1,109bp underperformance seen in April-August 2010 (see Figure 1). #2: Cyclicals now trade at a 4% discount to Defensive (rel P/E), lower than the rel P/E as of August 2010 and well below long-term average of 114% (see Figure 3). #3: EASI/CESI is at oscillator low and economists cutting forecasts now. 4: Capitulation evident in bearish AAII reading—a quality contrarian Buy signal.”
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