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[Chart Of The Week] Money Keeps Flowing Into Consumer Discretionary!

September 6, 2018

This has been the big theme throughout this bull market: Money flowing into Consumer Discretionary stocks at a more rapid rate than towards Consumer Staples. By our work, this is characteristic of an uptrend in U.S. stocks and has been a great tell for a long time. You guys following along for the past few years know that well. We even nicknamed the Staples underperformance as, "The Most Bullish Chart On Earth" (See May 2017)

As we finished up the month of August, I published my monthly review and included this beauty here below: Consumer Discretionary breaking out to new all-time highs relative to Consumer Staples. This has been a great leading indicator, as it peaked well before the S&P500 topped in 2007 and also bottomed a quarter before S&Ps finally bottomed in March of 2009:

I think this is a good one to watch moving forward to gauge how the long-only community is positioning themselves moving forward. Remember, in the mandates of a lot of these funds, they cannot have any cash, or very little of it, and they can't short stocks either. The way they beat their benchmarks is to overweight Discretionaries and underweight Staples on the way up, and then do the opposite on the way down. This is a process, however, not an event. I like to think of it as a cruise ship making a 180 degree turn. You can see the process happening well before it's complete.

Is their behavior characteristic of risk appetite (XLY > XLP) or risk aversion (XLP > XLY). New all-time highs in the S&P500 and most of the other indexes is being confirmed with new all-time monthly closing highs in the XLY/XLP ratio, as you can see above. If we start to see a divergence in the ratio, compared with the performance of the S&P500, like we've seen prior to former tops in the market, then reevaluating the circumstances and looking for other bearish signals is prudent.

So far we have not seen that, but we will be watching moving forward.

Tell us what you think.

- JC

 

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