Overtime

Consumer Discretionary

Good morning,

Yesterday’s Playbook looked at the idea that one of my favorite indicators (the consumer discretionary vs. consumer staples ratio) may be deceiving us.

The reason? Consumer staples are just terrible.

When we look at retail stocks (XRT) or the equally weighted consumer discretionary sector (RSPD), things just don’t look that strong. And that’s interesting because the prevailing narrative is that this market is being held up by the consumer.

So, today we’re taking discretionary into Overtime, to see how pervasive the weakness is, as well as:

• Relative strength vs. the broad market

• Breadth

• Technicals of focused ETFs

• Leading and lagging stocks

• and more!

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Top-down technicals

XLY: SPDR Select Consumer Discretionary ETF

Just like the S&P 500, XLY is trapped below a downward-sloping 50-DMA and a rising 200-DMA. The sector found support at the February highs and as long as that holds, I think it is right to have a positive bias toward this chart. First key level to overcome will be $167.

Trend scores heading in the wrong direction

Using our objective trend score (0-8 possible), XLY scores a middle-of-the-road 4. However, the development of the score is important here. 3 months ago, XLY would have scored a full 8, but now the shorter-term moving averages have all rolled over in absolute and relative terms. It is hard to advocate putting money to work in this sector until some of the moving averages (and thus the score) turn higher.

RSPD: Equal Weight Consumer Discretionary ETF

EW discretionary is in a far less healthy spot, recently hitting its lowest level since March and below all key moving averages. A slight bullish momentum divergence helps the case for a bounce, but it is a bounce I would be selling.

Both are making new highs vs. staples

As I showed in yesterday’s Playbook, both the cap and equal-weight discretionary sectors have broken out vs. their consumer staples counterparts. That’s usually very bullish, but might deserve an asterisk this time considering how poor staples have been.

Breaking down vs. the S&P 500

Our trend score already covered the recent weakness in discretionary vs. the S&P 500, but taking a look at traditional technicals you can see the cap-weighted relative strength (orange) has recently broken through support. In equal-weighted terms (black), discretionary is making 6-month lows vs. the broad market and has broken the uptrend channel that was in place for more than a year.

Breadth suggests broad-based weakness