The Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) gained nearly 10% last year, good for the best performance among the sector SPDR exchange traded funds, but 2015’s top-performing sector could face some challenges early in 2016.
With wages up and inflation low, the University of Michigan revealed consumer sentiment rose to 92.6 in December, or just shy of the 92.9 average for 2015, the highest reading since 2004, Reuters reports.
“The December gain was largely due to lower inflation, which bolstered real incomes and brightened buying plans for household durables,” the survey’s chief economist, Richard Curtin, said in a release. “Indeed, there have been only three surveys in more than the past half century in which a higher proportion mentioned the availability of price discounts for durables.”
Spending on durable goods, which include automobiles, rose 1.1% after adjusting for inflation, reports Sho Chandra for Bloomberg.
Meanwhile, the consumer sectors are being supported by increased spending as Americans enjoy improved employment rates, cheap gasoline and rising home-equity. Moreover, retailers are also capitalizing on the increased foot-traffic as shoppers take advantage of holiday discounts.
On a technical basis, XLY could be vulnerable to a near-term pullback. The consumer discretionary sector “started to show weakness during the 4th quarter. As early as November, the XLY was showing cracks. Perhaps this was the markets way of hinting that higher rates wouldn’t set well with the consumer. The jury is still out on that, but boy do the charts look ominous,” according to See It Market.
Last year, XLY and rival consumer cyclical ETFs were boosted by richly valued stocks such as Amazon.com (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Priceline.com (NasdaqGS: PCLN). However, frothy valuations throughout the discretionary space could be the catalyst for a near-term retreat.
On the charts, See It Market points out that XLY’s relative strength is waning while showing indications of a topping pattern.
Consumer Discretionary Select Sector SPDR
