There are a few things to note about the relationship of discretionary stocks to energy. First, the price ratio does tend to trend fairly well, meaning that leadership of a sector relative to the other appears to persist for exploitable periods of time. Notice in particular how energy outperforms discretionary stocks when oil prices rise at a consistent pace as they did once QE2 was implemented in the latter half of 2010.
The ratio also tends to spike when oil prices are significantly weak and dropping as occurred in September of last year when commodities fell hard on the European debt crisis.
It appears that the outperformance of the discretionary sector is now coming to an end, as the far right of the chart looks to be signaling a period of weakness ahead for all-things consumer relative to energy stocks. This may not bode well for equities in the near term given how important the discretionary sector has been to the bull market that began in March 2009. Further escalations in the Middle East may be the straw that breaks the consumer’s back.
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.