Up 6.3% year-to-date, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) has easily outperformed the S&P 500, but June historically being a weak month, investors might want to consider a temporary reduction in discretionary exposure.
According to MKM Partners market technician Jonathan Krinsky, over the past decade, June has been the worst month of the year for stocks, with the S&P 500 averaging a 1.32% decline, and financial stocks have lead the weakness, reports Tomi Kilgore for MarketWatch. [June is the Worst Month for Stock, Equity ETFs]
The financial services sector is usually the worst performer in June, but consumer discretionary isn’t anything to write home about either as XLI averages a 2.5% June decline. Add to that, XLY’s estimated 2015 P/E ratio is 20.2 compared to 17.7 for the S&P 500, according to AltaVista Research. The research firm rates XLY, the largest consumer discretionary ETF, underweight.
“Typically, funds in this category consist of stocks trading at relatively expensive valuations and/or having below-average fundamentals,” said the research firm. [Be Careful With These ETFs in June]
Investors could subject XLY and related ETFs to a holding pattern as they wait for clues regarding the timing of an interest rate hike from the Federal Reserve. Historical data suggests that discretionary and retail sectors could slow down after the Fed hikes rates.
“Firms in the sector have become leaner in the years since the financial crisis, although we question the big uptick in margins implied by consensus estimates for 2015-16, especially as savings at the gas pump aren’t being spent elsewhere, and estimates continue to drift lower. Valuation multiples have traded in a fairly narrow range over the past year — see the P/E ratio — but the sector remains richly valued versus the S&P500 in our opinion,” according to AltaVista.
Investors have added $261.3 million to XLY this year, but the fund still faces technical challenges.
“It is looking vulnerable at least near term. Last Friday, XLY found support at its 50-day moving average (76.18). Odds favor it loses that. There are some early signs of market participants preferring risk-off at the moment. Demand for VIX (Volatility Index) calls in June and July expirations – former in particular – has shot up; and of late in the futures market, June has seen a faster rise in price,” according to See It Market.
Consumer Discretionary Select Sector SPDR
