Blink and you'd have missed it. Cautious investors have been cowering in cash while the more adventurous types have sought out high-yielding defensive stocks.
But in the past six months a change has taken place on the Australian stockmarket. Companies typically classified as cyclical, relying on a strong economy to increase earnings, have come to life and are rocketing higher.
The benchmark All Ordinaries Index has registered a 12 per cent gain since bottoming out in early June this year.
The high-yielding defensive darlings of the market continued to perform strongly in this period, with Telstra clocking up a 21 per cent capital gain, Commonwealth Bank rising 24 per cent, Westfield 15.9 per cent and Tatts 16 per cent.
Standing above all these names is blood products group CSL, up a stunning 39 per cent.
Now, let's turn to the cyclical crowd and see how they have faired in recent times. In the maligned building materials sector, CSR has notched up a 68 per cent capital gain since hitting decade lows in early July. Competitor Boral, which is also exposed to an improving US housing market, has enjoyed a 38 per cent gain since late June. BlueScope has put them all the shade by doubling in price, which makes a term deposit of 5 per cent look a little sick.
In the financial services sector Macquarie Group has been on a roll, jumping 40 per cent since early June, while fund manager Perpetual is up a hefty 51 per cent from the market bottom of June 4. British-based fund manager Henderson Group has joined the party, rising 40 per cent since late July.
The highly cyclical transport sector has also found support. Despite Qantas' well documented problems, its share price has leapt 33 per cent, while trucking giant Toll has recently come to life with a 22 per cent gain.
Even the structurally challenged discretionary retail sector has been in high demand, with Myer easily beating the market with a 45 per cent increase since June, although electronics retailer JB Hi-Fi has lagged somewhat, with a 30 per cent gain.
About this time cyclic investors will start picking over the media sector, which usually picks up six or nine months after the initial move by housing, transport and retail stocks. Due to structural issues this may not take place this time around.
Many commentators have poured cold water on the cyclical side of the market, saying it is too early to venture away from the resilient defensive market. However, the overall market has ignored these warnings and is in the process of placing bets on an economic recovery somewhere down the track.
The most defensive of all sectors - the ultimate fear trade - gold has become friendless in recent times despite the likes of hedge fund guru George Soros publicly declaring his overweight position. The bellwether of Australian gold stocks, Newcrest, has dropped 15 per cent since early September.
The examples I have chosen above are obviously selective to make a point. However, as the world has been worried about the European debt crises, the US fiscal cliff and a slowdown in China, the local stockmarket has been dancing to a different drumbeat.
At the heart of this move towards cyclical stocks has been the continuing loosening of domestic monetary policy. Almost against its will, the Reserve Bank has now cut official interest rates by a sizeable 175 basis points over the last 18 months. This slow process has slowly changed the state of play.
The early moving investors are betting that as interest rates go on falling the domestic economy will have to improve in the next 12 to 18 months. These investors are too impatient to wait for the earnings to flow through.
The question now is whether this trend can continue? Are the cyclical stocks already out of puff and too expensive to consider? At the bottom of a cycle, companies that rely on economic growth will look expensive. Investors get transfixed on current earnings and simply can't justify paying up. But history tells us this may be the wrong approach. The more profitable approach has been to work out what these companies have earned in previous cycles, providing a sound guide on what they can earn when the domestic economy is again growing at about 4 per cent.
Many investors will dismiss what is going on as temporary and as a false dawn in a secular bear market. This may well be true, but only time will confirm their belief.
However, this time around the combination of lower interest rates and a rally in cyclical stocks is typically a sign that the worst may just be behind us. If global stockmarkets can overcome their fiscal cliff jitters over the new year, the cyclical beauty parade may run right through until the middle of 2013.
For those who decide to play the cyclical game, you must be aware that these are not stocks you buy and put in the bottom draw. The time to depart will be when their actual profits start to rise.
Another sign will be when a slew of capital raisings through initial public offerings and placements hit the market.