Consumer Discretionaries have been a great indicator of market strength for a long time. This has been the best performing sector off the 2009 lows by a long shot, nearly doubling the performance of Tech, which has also been a monster. Discretionaries broke out to new highs in early 2012, well before the S&P500 and Dow Jones Industrial Average. With this sector breaking out to new all-time highs last month, it’s hard to be bearish stocks.
Here is a chart showing Discretionaries and the Dow. They look the same and now $XLY is making new highs:
Here is a closer look at the Consumer Discretionary sector. It is very clear that this 105 level is important. That is where prices struggled throughout the year until more recently. The bet here is that we’re just now starting a new leg higher. In this case, $XLY to 128. This bullish bet hinges upon the fact that we’re now above 105. If that is not the case, then this thesis is invalid and we want no part of it:
Some would say that Discretionaries are being led by Amazon, which represents 22% of the entire index. Well if we take Amazon’s weighting out of the equation and compare the equal-weight Discretionary Index to the S&P500, we are in the midst of what could be the end of a 3-year relative downtrend:
This index is looking at all the discretionary stocks, which include Autos, Homebuilders, Retailers, etc and not just $AMZN $HD and $NFLX which together equal more than 1/3 of the entire Cap-weighted Index. A breakout here would be confirmation that Discretionaries as a group are heading higher, and therefore very difficult to be bearish stocks.
The predicament that Discretionaries find themselves in right now is an interesting one. Stock market bears are essentially betting that this is a major failed breakout in the $XLY that we saw to new all-time highs last month. If we’re below 105, then I would not argue with them. But we’re not. I think we rally. Here’s a closer look: