An efficient and ideal method for gauging risk appetite is the consumer staples/discretionary ratio, which is easily applied with the large, highly liquid Consumer Staples Select Sector SPDR (NYSEArca: XLP) and theConsumer Discretionary Select Sector SPDR (NYSEArca: XLY).

The quick explanation of the staples/discretionary ratio is that investors, excluding those that want to see equities fall, want to see the ratio falling because that means markets are favoring the higher beta discretionary sector over its staples counterpart.

For a good portion of the time since the March 2009 market bottom, the XLP/XLY has been cooperative and conducive to increased risk appetite, but there have been periods when the ratio has signaled reduced risk was the way to go and that could be the case again now. [Bad News From Consumer ETFs]

“The Staples/Discretionary ratio has been in a steady downtrend since 2009, which reflects investors have been comfortable with risk, pushing more money towards discretionary holdings (risk on trade). A falling resistance line has been in play for the past few years, until recently. Of late the ratio is breaking above resistance, reflecting that money flows now are turning towards Staples (risk off trade),” according to Chris Kimble of Kimble Charting Solutions.

What is worrisome about the XLP/XLY ratio moving higher is the ratio’s track record at identifying market tops. For example, the ratio surged in 2007, prior to the global financial crisis. Although the sector SPDR ETFs trace their first full trading year back to 1999, which does not make for the longest track record, there are other instances where the XLP/XLY identified significant market shifts. [Big Signs From Consumer ETFs]

To this point in 2015, investors have favored XLY over XLP, pouring almost $343 million into the former while pulling nearly $104 million from the latter. Last year, XLP added $2.34 billion in assets while investors allocated $1.59 billion in new money to XLY.

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