Let’s quickly clear up that headline. The truly bad signs are emanating from the consumer discretionary sector and exchange traded funds such as the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY).

The bad news comes by way of continued erosion in the comparative performance of XLY and the Consumer Staples Select Sector SPDR (NYSEArca: XLP). Last week, we reported that the XLP/XLY ratio was closing in on a 52-week high, cementing the notion that defensive names are more in style at the moment. [Staples ETFs are Loving This Market]

Flipping the comparison around to make it XLY/XLP, Eagle Bay Capital President J.C. Parets highlights the ratio’s failed upside breakout a decade ago, an ominous sign, but there is more to be concerned about.

“The second thing that bothers me is that we are now breaking the uptrend line from the late 2008 lows. This is a big break because this particular ratio led the market at the top in 2007 as well as the bottom in 2009. Notice how this ratio was already crashing in the summer of 2007, well before the S&P500 peaked in October of that year. Also, this ratio bottomed out in November of 2008, several months before the S&P bottomed in March of the following year,” said Parets.

Confirming the weakness in discretionary stocks is this factoid: Over the past month, only three of the nine sector SPDR ETFs have delivered worse performances than XLY’s 7.2% drop. On the other hand, only the Utilities Select Sector SPDR (NYSEArca: XLU) has topped XLP, another sign of investors’ overt preference for defensive sectors. [Reliable Utilities Remain Firm in Volatile Market]

During that period, two of the best performers in the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) have been staples stalwarts Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT).

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