Consumer Discretionary vs Consumer Staples Ratio at October Highs

The S&P500 has already broken above its October highs. We now want to see confirmation from the right sectors. One of the most informative ratios that we can look at is Consumer Discretionaries vs Consumer Staples ($XLY:$XLP). For example, when the S&P was making higher highs last spring, this ratio had already rolled over (look at the bearish divergence with green dotted lines). We saw the opposite signal at the October lows. While the S&P500 was putting in lower lows, this ratio held on and made a slightly higher low. This bullish divergence sparked a 20% rally in less than a month:

We see how important it can be for this ratio to confirm. We are now at a critical level for $XLY:$XLP. The downtrend line from last February has been penetrated to the upside - that's a good thing. So now that we have higher lows in place, we need to see higher highs for confirmation of the S&P500's action.

We've been saying all year that the right sectors have been leading this market higher. All signs point to new highs in this ratio, but I wanted to point it out this morning because I think a divergence here could spoil all the fun.

Go get 'em

Tags: $SPY $ES_F $SPX