Discretionary/Staples Divergence a Positive Sign

ETF Trends

Just three of the nine sector SPDRs exchange traded funds are higher on a year-to-date basis.

The Consumer Discretionary Select Sector SPDR (XLY) and the Consumer Staples Select Sector SPDR (XLP) are not in that group of three. However, XLY’s out-performance of XLP, albeit slight to this point in 2014, could be a positive sign for those predicting further upside for U.S. stocks. [Staples ETFs Have Problems]

“Think about it, even if the economy stinks, we’re still going to brush our teeth, wash our dishes, drink beers and smoke cigarettes. That won’t change,” said Eagle Bay Capital President J.C. Parets. “This is why the chart comparing these two sectors is so important to us: the $XLY/$XLP ratio.”

Parets notes the XLY/XLP ratio can be “a leading indicator for the overall market” while highlighting the fact that it “peaked in early 2007 and failed to make a new high before the overall market topped and crashed. Then at the bottom, the discretionary/staples ratio bottomed in November, well before the overall market did the following March.”

While staples stocks and ETFs like XLP are prized conservative income investors and are useful in the early innings of recovery from a bear market, the sector has come under pressure this year as investors have fretted about slowing sales and lost pricing power.

Emphasizing the weakness in staples is that it is inaccurate to say investors have not favored lower bet sectors in 2014. After all, the Health Care Select Sector SPDR (XLV) and the Utilities Select Sector SPDR (XLU) are by the top-performing SPDRs since the start of the year. [Health Care Valuations on the Rise]

XLY was the top performer among the nine sector SPDR ETFs in 2013. S&P Capital IQ has a five-star rating on shares of Dow component Walt Disney (DIS) and a four-star rating on Comcast (CMCSA). Those stocks combine for 13% of XLY’s weight. [A Mixed View on Discretionary ETFs]

XLY has been restrained this year by an 11.4% decline by Amazon (AMZN) and a 5% drop in shares of Home Depot (HD). Those stocks combine for nearly 12% of XLY’s weight.

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Chart Courtesy: J.C. Parets, Eagle Bay Capital

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Amazon.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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