As more investors were heading into bonds amid the summertime volatility, they also added safer plays like consumer discretionary equities to their portfolios. However, recent weakness in consumer staple funds like the Consumer Discretionary Select Sect SPDR ETF (NYSEArca: XLY) could be a sign that more cyclical strength could be ahead.
A CNBC report noted that XLY is “up more than 22% in 2019, but as of Friday’s close, more than half of the stocks in the sector found themselves in correction territory.”
XLY seeks investment results that correspond to the price and yield performance of publicly traded equity securities of companies in the Consumer Discretionary Select Sector Index. The index includes securities of companies from the following industries: retail; hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; auto components; distributors; leisure products; and diversified consumer services.
“Even as (the XLY Consumer Discretionary ETF) is appreciating, it is underperforming, and basically at or near 52-week lows in terms of opportunity cost, or alpha,” said Cornerstone Macro Head of Technical Analysis Carter Worth.
From a technical perspective, XLY hit a roadblock in July—being unable to break new highs as it flirts with 52-week lows despite appreciating. With dissipating strength in one of consumers staples’ prime funds, the reinvigorated risk-on sentiment could put cyclical equities back in vogue and more defensive maneuvers out of favor.
“We have consistently come to life off this line, and now we have broken below that relative line, and I think what is going to happen, ultimately, is that we break on an absolute basis as well,” said Worth.
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
RWCD seeks investment results that track the MSCI USA Cyclical Sectors – USA Defensive Sectors 150/50 Return Spread Index (the “index”). The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in securities that comprise the Long Component of the index or shares of exchange-traded funds (“ETFs”) on the Long Component of the index. The index measures the performance of a portfolio that has 150% long exposure to the MSCI USA Cyclical Sectors Index and 50% short exposure to the MSCI USA Defensive Sectors Index.
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