Important Signals from Discretionary, Staples ETFs

The S&P 500 is up 5.6% over the past month and has been , on what feels like an almost daily basis, hitting record highs.

At the sector level, however, there are ample signs investors are eschewing risk, a scenario confirmed by the recent, overt favoritism investors have afforded consumer staples exchange traded funds. For example, the Consumer Staples Select Sector SPDR (NYSEArca: XLP) has outpaced the S&P 500 by 60 basis points over the past month.

Since the start of the fourth quarter no sector ETF has added more new assets than XLP and only eight ETFs of any type of have added more new assets than the $1.44 billion that has flowed into XLP, the largest staples ETF. [Investors Rush to Safe Staples ETFs]

The impressive performances notched by XLP and rival staples ETFs are not problematic, but what is potentially worrisome is the inability of consumer discretionary ETFs, such as theConsumer Discretionary Select Sector SPDR (NYSEArca: XLY), to usurp their staples counterparts. As has been previously noted, the XLY/XLP ratio can prove effective in measuring investors’ appetite and warning of market pullbacks. [Worrisome News for Discretionary ETFs]

One quick way to analyze investors’ appetite for risk is to look at the ratio of Consumer Discretionary (XLY) vs Consumer Staples (XLP) stocks. The idea here is when investors are willing to take on more risk, they favor XLY and thus, the ratio line will move upward,” notes Tom Psarofagis of AGD Capital Management.