Many technical analysts monitor the relative performance of ETFs tracking consumer discretionary and consumer staples stocks to get a feel for the strength of the economy.
Some call this the “need vs. want” trade. Consumer staples companies sell products such as razors and toilet paper that families need in any economy. Consumer staples are considered a defensive sector along with healthcare and utilities. [What Staples and Discretionary Stocks Say About Risk Appetite]
Meanwhile, consumer discretionary firms are more cyclical and do better when Americans are more optimistic and spending that extra cash.
For example, Tarquin Coe at Investors Intelligence notes that Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) maintains its uptrend against Consumer Staples Select Sector SPDR (NYSEArca: XLP). [Retail ETFs Making New Highs as Economy Improves]
“Providing this trend remains up then the market is a buy. A test of the 2007 peak is the target. Only if the ratio were to roll-over would the need to play defense be necessary,” the bullish analyst wrote in a newsletter.
“Regarding the Cyprus situation, it will only cause a small blip in the general equity rally and that blip is already in the rear-view mirror. Any residual weakness in the market is a buying opportunity,”
he added. “The U.S. market is just too stubborn to let events from a small island in the Mediterranean, impact its ongoing upward trajectory.”
The chart below shows the relative performance of consumer discretionary vs. consumer staples.