This Indicator SCREAMS Risk-On!

JC Parets
September 28, 2021

You know me, I'm skeptical of everything and everyone.

You have to earn my trust.

And if there's one indicator in this market that has earned my trust and attention over the years, it's the relationship between Consumer Staples and the rest of the market. More specifically, Staples relative to Consumer Discretionary stocks.

You see, when portfolio managers believe stocks are going higher, they are going to overweight Consumer Discretionary stocks. These are things like Retailers, Automobiles and Housing stocks. Areas where "Consumers" spend their "Discretionary" Income.

Consumer Staples, on the other hand, are things "Consumers" are going to spend money on regardless of economic conditions, therefore being "Staples". Think Toothpaste, Laundry Detergent, Beer, Soda and Cigarettes.

I have two ways to look at these:

The first, and most popular, is Market-Cap weighted, where Amazon represents about 23% of Consumer Discretionary, with Tesla being another 13.5%, and Home Depot another 9% or so. In Consumer Staples, Procter & Gamble represents over 15%, while Coke & Pepsi combine for almost 20%.

The second way to view this is Equally-weighted, where all the components carry the same % weighting.

My point here is that any way you slice it, whether you eliminate the Amazon effect or not, Discretionary is breaking out of an 8-month base relative to Staples.

And that likely means much higher stock prices.

So that means we want to be spending more time looking for stocks to buy, rather than looking for stocks to sell.

Do you agree?

Are you one of these gloom & doomers who is going to ignore these recent developments?

Let us know!

We love to hear from you.

But for us, if these ratios are above their Q1 highs, then we think it's time to be buying stocks.

See this week's Minor Leaguers Report and Follow-The-Flow Report to check out our latest and greatest trade ideas.

JC

 

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