Many technical analysts keep a close eye on the relative performance of consumer discretionary ETFs versus the consumer staples sector to gauge risk appetite in the market.
The rationale is fairly simple. Consumer staple companies provide the necessities that households need in any economy. Think toilet paper, razor blades and shampoo.
The consumer discretionary sector by definition includes companies that market and sell nonessential goods and services.
Therefore, Consumer Discretionary Select Sector SPDR Fund (NYSEArca: XLY) can be thought of as the “want” portion of the consumer sector. Consumer Staples Select Sector Fund (NYSEArca: XLP) is the “need” portion.
When “want” is outperforming “need,” some analysts see the trend as bullish for markets and the economy.
“One of the relationships I follow is between consumer staples and consumer discretionary ETFs,” writes technical analyst Andrew Thrasher at his blog. “Often during declines in equities we see a relative outperformance in consumer staple stocks in relation to discretionary names. This can show us if traders are positioned for a ‘risk on’ or ‘risk off’ market environment.”