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If investors believe the U.S. economy is turning around, they have a funny way of showing it. No, this isn't a comment on the level of major equity indexes. The S&P 500 has risen more than 14 per cent this year and is now just 8.5 per cent below its record high in 2007.

Rather, it is a comment on what is moving within major indexes – cyclicals are out of favour while defensive stocks are in.

Pavilion Global Markets pointed out on Thursday that the Dow Jones Transportation Index has been trending sideways throughout 2012. This is an index of 20 U.S. transportation stocks – including FedEx Corp., Union Pacific Corp. and CH Robinson Worldwide Inc. – that are heavily dependent upon a thriving global economy.

While transportation stocks are flat, the more diversified Dow Jones industrial average has risen, leading to the lowest ratio of transports to industrials since the end of the recession.

"If investors believed that recent announcements of liquidity injections would boost the real economy, cyclical stocks, which do well in an accelerating economy, would have taken off," the Pavilion strategists said in a note. "The fact that cyclicals are lagging tell us that market sentiment is weak."

They also looked at broader measures, comparing the Thomson Reuters cyclicals versus non-cyclicals. Again, defensive stocks come out on top. Non-cyclical stocks are now considerably higher than they were before the global recession, while cyclical stocks are well below their peaks.

More recently, since the start of 2011, non-cyclicals have also outperformed cyclicals – despite the latest attempt by the U.S. Federal Reserve to give the economy a boost with open-ended quantitative easing or bond buying.

The same trend can be seen for emerging markets, Europe and the G7.

"Valuation-wise, we note that defensive sectors are still more expensive than their cyclical counterparts," the strategists said. "The recent rally has increased P/Es in all sectors. And yet, investors chose to pile up even more in defensives. To us, this is a sign that the investing community expects the recent liquidity injection announcement to have limited impact on the real economy."

It will be interesting to see if these trends now shift. The Fed has undertaken numerous stimulus moves, with little to show for it: In the latest reading on economic growth, U.S. gross domestic product expanded by just 1.3 per cent in the second quarter, at an annualized pace. So, it is understandable that investors should take a wait-and-see approach to the Fed's latest efforts.

However, there are some signs that the economic gloom could be lifting. The U.S. Labor Department delivered an upbeat report on September payrolls last Friday, which including a surprising dip in the unemployment rate. Housing activity is also showing signs of turning around, while Thursday brought the lowest reading on U.S. initial jobless claims in more than four years.

Bank of America chief investment strategist Michael Hartnett said in a note earlier this week that the spring of 2013 could bring a "great rotation" from bonds into stocks as more investors recognize the improvements.

"The turns in U.S. housing activity indicators are very encouraging, such as the homebuilding stocks and U.S. bank stocks in particular," Mr. Hartnett said.

"Both signal markets are quietly beginning to discount the revival in 2013 of the two missing ingredients of a strong U.S. recovery: credit and jobs. If bond yields begin to rise alongside homebuilder and bank stocks, a major asset allocation shift would be warranted, in our view."