Here is a simple, yet very important chart, that we look at quite often: Consumer Cyclicals (or discretionaries) relative to Consumer Staples. When times are good and markets are healthy, we definitely want to see cyclicals outperforming staples. This longer-term chart shows that this ratio has been in more of a range over the last few years than trending in either direction.
We’re looking at a weekly line chart of $XLY vs $XLP bumping up against the high 1.30s once again. This time, we’re approaching this big resistance after putting in 4 consecutive higher lows. This tells us that the buyers over the last couple of years are getting less and less patient and are willing to buy at higher prices. This bullish activity, in our opinion, increases the likelihood that we break out to fresh multi-year highs:
The more times that a level is tested, the higher the likelihood that it breaks. You can make the argument that this is now at least the fourth test of resistance, weakening the amount supply up here. Momentum is also showing positive signs. The Relative Strength Index (RSI) has been holding bullish support levels for a year and a half.
From a sector rotation standpoint, it’s been no secret that defensive names have been the leaders this year, Staples included. Relative strength out of Cyclicals here would be very positive for the overall market. And on an absolute basis, this would be nothing new for the cyclical space. Two years ago $XLY broke out to all-time highs and just last year made all-time highs in relative strength. So the leadership has been there in its own right. Now we want to start to see it vs staples.
Tags: $XLY $XLP $SPY