There is a yin and yang effect in stock markets. Some industries perform well when others don’t, and they stay locked in that relationship.

The best known of these relationships is the swing between financial services stocks and asset (or commodities) stocks. When one of this pair performs strongly, the other is weak. Then, they trade places.

There is a similar long-standing see-saw effect between consumer- and capital-goods stocks. Currently, capital-goods stocks in Canada are outperforming consumer goods.

The consumer/capital pairing dates back to 1926, when Standard & Poor’s Corp. introduced composite subindices of U.S. consumer-goods and capital-goods stocks. Through the years, when one subindex has been performing strongly, the other has not.

S&P no longer publicizes its Wall Street consumer- and capital-goods composite subindices; but in Canada, the current S&P/TSX GICS indices do contain a capital-goods industry subindex and two consumer-goods sectors — discretionary and staples. These subindices, dating back to 1998, changed places when the market bottomed in February and March of 2009.

Since then, the S&P/TSX capital-goods subindex has outperformed, climbing by 75%. In contrast, the consumer-discretionary subindex has risen by 32% and the consumer-staples subindex has risen by 13%.

There is no guide to how long the capital-goods predominance will last — previous capital/consumer-stocks swings have varied greatly in duration. Wall Street’s history covers 60-plus years, in which there were 10 distinct swings from one sector to the other.

For example, in the great postwar bull market, U.S. capital-goods stocks were strong from 1945 to 1957. In that stretch, the S&P capital goods subindex climbed by 244%, while consumer goods trailed with a 97% gain. Then, the pattern reversed and consumer stocks were strong from 1957 to 1963. During this time, they gained 92% while capital goods gained about one-third as much, or 35%.

In the S&P/TSX subindices’ short history, there have been five changes of weight, with one slow-motion reversal that occurred by degrees over the course of seven months at the height of the bull market in 1998-99. Consumer stocks predominated in the long run between 2000 and 2004, and then outperformed for less than a full year in 2008-09.

Between 2000 and 2004, the S&P/TSX capital-goods subindex dropped by 74% and the consumer-staples subindex rose by 81%. The existence of two consumer subindices does complicate the scene, though, because in this period, the consumer-discretionary subindex fell by 13%.

Then, the see-saw tipped and produced a clear-cut contrast in the next four years. The capital-goods subindex rose by 111% while the consumer-discretionary subindex fell by 2% and the staples subindex dropped by 12%.

The latest trend focuses attention on 16 capital goods stocks and income trusts in the S&P/TSX’s composite, completion and small-cap indices. (See table, at right.)

Bombardier Inc. and Wajax Income Fund currently lead the parade, with their recent prices above their six-month average prices by 22% and 23%, respectively. In contrast, the S&P/TSX composite index is 5% above its six-month average.

Russel Metals Inc. and CAE Inc. follow in relative strength — a good pointer to continuing outperformance for the intermediate term.

Levels of price/sales ratios, another valuation measure, range widely. Ag Growth International Inc., a former income trust, has been on an acquisition spree, reflected in its high P/S ratio. At the other end of the P/S spectrum, Aecon Group Inc. and Wajax rate as the cheapest stocks in the group.

Many stock analysts rate cash flow as more significant than earnings in assessing corporate performance. The accompanying table shows “discretionary cash flow” — cash from operations after capital spending and dividend payments. Notable is the high, positive figure for Russel Metals, which had reported a net loss in 2009.

The equity/assets ratio is a shorthand measure of balance sheet strength. To remove the influence of large goodwill and intangible items, tangible equity and tangible total assets were used in the calculation. ATS Automation Tooling Systems Inc. and Toromont Industries Ltd. rate strongest when applying this measurement.

With the current emphasis on balance sheet strength, cash per share is also a significant figure for analysts. All companies rate positively on this. Note the large proportion of cash held by Bird Construction Income Fund, Churchill Corp. and Russel Metals, followed by SNC-Lavalin Group Inc. and Ag Growth. IE