It is not a perfect market indicator on its own, but measuring the ratio of the consumer discretionary sector against its consumer staples counterpart can give investors some sense of broader risk appetite.
At the moment, they may not like what that ratio turns up. Over the past 90 days, the Consumer Staples Select Sector SPDR (NYSEArca: XLP) is the third-best performer among the nine sector SPDR ETFs while the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) is easily the worst performer. [Declining Discretionary ETFs]
The XLY/XLP ratio “ratio has not been a great independent indicator at major market turns. Its track record over the past several cycles (since 2000) has only been fair. I am not looking at it alone, however. Added to the decline in other sectors, including technology, homebuilding and financials, the shift away from consumer discretionary stocks is a bad sign,” writes Michael Kahn for Barron’s.
One problem, or is it nine?, for XLY is that only one of its top-10 holdings has traded higher over the past month. That honor goes to McDonald’s (NYSE: MCD). Conversely, only one of XLP’s top-10 holdings, CVS Caremark (NYSE: CVS), has traded lower over the same period. That represents a reversal of fortune from earlier this year when nearly all of XLP’s marquee names stumbled to start 2014. [Staples ETFs Struggling]
It is important to note that just because the discretionary sector is struggling, that does not mean the broader market is in for gloom and doom. The discretionary sector is merely the fourth-largest sector weight in the S&P 500 and the Dow Jones Industrial Average.
However, XLY “is just a hair’s breadth away from breaking its 200-day moving average to the downside. If that happens, then the list of sectors putting a drag on the overall market will expand, possibly past the tipping point,” writes Kahn for Barron’s.
Industry weakness is providing another clue regarding the weakness the broader discretionary group is currently contending with as media and gambling stocks have pulled back over the past month.
The SPDR S&P Retail ETF (NYSEArca: XRT) is off 4.5% over that time, but there are some signs of life. The First Trust NASDAQ Global Auto Index Fund (NasdaqGM: CARZ) is higher by 4.4% over the past 30 days.
XLY/XLP Ratio Chart
