Lessons from the Consumer Discretionary, Staples ETF Rivalry

One day does not make a trend, but as U.S. stocks rallied to close firmly in positive territory Monday, the sector exchange traded funds doing the leading off the day’s lows were decidedly boring.

Save for some pockets of strength of among energy ETFs, Monday’s best-performing non-leveraged ETFs largely hailed from the utilities and consumer staples sectors. For example, the Consumer Staples Select Sector SPDR (NYSEArca: XLP), the largest consumer staples ETFs by assets, jumped almost 2.1% Monday on more than double the average daily volume. On the other hand, the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) did not even gain 1%, though volume in the ETF was heavy.

As the chart below, courtesy of Chris Kimble of Kimble Charting Solutions, illustrates, the staples/discretionary ratio is not yet at alarming levels. However, XLP has outperformed XLY by nearly 100 basis points over the past month.

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]

In what may an encouraging for XLP, four of the ETF’s five largest holdings have plenty of room to run to get back to their 52-week highs. For example, Dow components, Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO) and Wal-Mart (NYSE: WMT) are an average of 13% below their recent highs. That trio combines for 28.7% of XLP’s weight.