Think of the trend of the above ratio as a sentiment indicator. When the ratio trends higher, it means investors favor lower-beta stocks, causing the consumer staples ETF to outperform higher beta consumer discretionary stocks. Basically, when investors are afraid of equity volatility, staples/need outperforms discretionary/want.

Notice how the ratio has been trending higher as early as February this year. It appears the ratio peaked in mid-August, and that a possible downtrend may occur in the very near-term if that peak does not get violated. In other words, need may begin to underperform want. Why would this be the case unless there was some anticipation for an improvement in equity prices and the economy?

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.