Discretionaries vs Staples Ratio Testing Key Channel Resistance
*** Updated at 6:30PM ***
When I put the chart up this morning we discussed major resistance at current levels that needed to clear before getting too excited. Well that didn't take long at all. I'm pretty excited about owning US equities here. This is a ratio that I don't hear people discussing very often so maybe that's why I use it as much as I do. As long as the $XLY:$XLP ratio can hang on to these breakout levels without rolling over, I think a nice July rally is in the cards. As discussed on a June 22 post, the major averages held on to their 200 day Moving averages so this is what we want to watch as a risk management tool throughout the rest of the summer.
Here is the updated chart:
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- Posted by JC Parets on June 28th, 2011 at 8:12 am
Here is an updated look at our favorite risk-on/risk-off ratio: Consumer Discretionaries vs Consumer Staples ($XLY:$XLP):
This ratio has quietly been rallying hard over the last couple of weeks. Currently we're testing key resistance from the top of this downtrend channel as well as the 200 day moving average. The fact that the slope of the 200 day is up is certainly a positive. On June 20th we saw a key reversal day that could have been the last shake out necessary to get this thing going.
As we know from our April 11th $XLY:$XLP post, this ratio is very highly correlated with the S&P500. When the Stock Market is rallying, Discretionaries tend to outperform Staples. The opposite of this is also true. Since this ratio broke down in April and May, the stock market has not been able to catch a bid. It has been a brutal equities market, until just recently when this ratio began to rally.
We want to see a clear breakout from this trend channel before getting excited. Another factor to watch here is RSI. This oscillator broke out through 3 month resistance and is now trying to get up towards an overbought level. We know from experience that when RSI gets to overbought levels, there is clear evidence of buying, and this is a good thing.
Let's revisit this ratio soon once we know the results of this test of resistance. Happy Trading.