The Best Stock Market Ratio

JC Parets
August 5, 2022

If there is one intermarket relationship that every stock market investor should be following, it's got to be the Discretionary vs Staples ratio.

Consumer Discretionary stocks represent those areas where "Consumers" spend their "Discretionary" income. These include Autos, Retailers and Homebuilders, among other things.

Consumer Staples are the stuff consumers are going to buy and use regardless of how bad the economy might get. These are things like Laundry Detergent, Toothpaste, Beer, Chips and Soda.

When Discretionary stocks are outperforming Staples, that historically happens when stocks in general are doing well and the S&P500 is moving towards the upper right of the chart.

When stocks in general are under pressure, Staples tend to outperform, holding up better than most other stocks, especially Consumer Discretionaries.

It's probably the most important correlation for US Stock Market investors to be aware of.

Here is that chart today making new 3-month highs:

One thing I've learned by following this ratio for most of my career is that it often leads.

You tend to see Staples start to outperform Discretionaries before the major indexes peak. And then near important lows, you'll often see Discretionaries start to outperform before the indexes bottom.

The peaks and troughs are often simultaneous as well, so we're always open to both outcomes.

But this ratio did peak 6 weeks before the S&P500 last year, for example.

And regardless, leading or coincidence, both are reasons to follow this ratio closely.

I like to plot it using the $XLY and $XLP ETFs just to keep it simple.

What do you got?

A better ratio?

Let's see it.

JC

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