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What Consumer ETFs are Saying About the Market’s Strength

tlydon@globaltrend.com (Tom Lydon)

An exchange traded fund indexed to the consumer discretionary sector is lingering near an all-time high and outperforming the S&P 500, which are good technical signs for the overall market.

Consumer Discretionary Select Sector SPDR (XLY - News) is up 17.7% year to date, while SPDR S&P 500 (SPY - News) has gained 11.4%, according to investment researcher Morningstar.

“The low-cost, highly liquid ETF, which owns 81 companies, is fairly concentrated and owns a variety of names that are tied to consumer spending, including retail companies, restaurants, media companies, apparel and luxury goods companies, automobile manufacturers, and leisure firms,” according to an analyst report on the fund.

“Before investing, however, investors should have a strong view on the macroeconomic climate,” Morningstar adds. “Investors should take note that the Consumer Discretionary Select Sector SPDR is a cyclical play tied to consumer spending.”

The relative chart of XLY versus the S&P 500 is also making new all-time highs, says Investors Intelligence technical analyst Tarquin Coe.

“On the relative chart note the rising 200-day exponential moving average which has effectively supported the rally since the March 2009 low,” he wrote in a newsletter this week. “A violation of that average would be evidence against the present bull market. However that looks unlikely anytime soon.”

J.C. Parets at the All Star Charts blog says one of his favorite measures of market strength is the ratio between consumer discretionary stocks and the “more defensive” consumer staples sector. He plots XLY against Consumer Staples Select Sector SPDR (XLP - News).

This ratio is at the highest levels since early last year, Parets notes. A continued move to the upside would signal further strength in equities and other “risk-on” assets. “As long as these new highs hold here, and it appears as though this will be the case, I would expect the trend of higher highs in equities to continue,” he concluded.