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The market's hottest sector is about to face trouble: Technician

Lawrence Lewitinn
·Lawrence Lewitinn

The best-performing sector in the past year is about to face headwinds relative to the rest of the market, according to Katie Stockton, chief technical strategist at BTIG.

Consumer discretionary stocks have trounced all other sectors, returning 18% in the last 12 months. That’s nearly twice the gains of the second-best sector, healthcare, and more than three times that of the S&P 500.

Sector

ETF symbol

Returns (10/20/2014 - 10/19/2015)

Consumer Discretionary

XLY

18%

HealthCare

XLV

10%

Consumer Staples

XLP

9%

Technology

XLK

8%

S&P 500

^GSPC

5%

Financial

XLF

3%

Utilities

XLU

2%

Industrials

XLI

-1%

Materials

XLB

-9%

Energy

XLE

-21%

 

But according to Stockton, the consumer discretionary sector – which includes Amazon (AMZN), Disney (DIS), Home Depot (HD), and McDonald’s (MCD) – may not outperform the market, at least in the shorter-term.

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Stockton charted the ratio of the ETF tracking the consumer discretionary sector (trading under the symbol XLY) compared to the S&P 500. Such a graph shows the relative performance of the XLY to the overall market, with a move up indicating outperformance and a move down signifying underperformance.

Top 10 XLY holdings

As of 10/16/2015

 

Company

Ticker symbol

Weight

Amazon.com Inc.

AMZN

9%

Walt Disney Company

DIS

7%

Home Depot Inc.

HD

7%

Comcast Corporation Class A

CMCSA

6%

McDonald's Corporation

MCD

4%

Starbucks Corporation

SBUX

4%

NIKE Inc. Class B

NKE

4%

Priceline Group Inc

PCLN

3%

Lowe's Companies Inc.

LOW

3%

Ford Motor Company

F

3%

 

“XLY has outperformed very significantly against the S&P 500 based on an uptrend in that ratio,” said Stockton, who is also vice president of the Market Technicians Association.

XLY vs S&P 500, courtesy of Katie Stockton, BTIG
XLY vs S&P 500, courtesy of Katie Stockton, BTIG

But that outperformance wasn’t steady. For much of this spring, the ratio of the XLY to the S&P 500 generally stayed within a range between 0.0360 and 0.0365 before resuming its rally.

Stockton believes the ratio will once again pause for a bit. She sees similarities to recent moves in the price of the healthcare sector ETF (XLV) relative to the S&P 500.

“The discretionary sector might be in store for the same a corrective move within the broader long-term uptrend,” predicted Stockton.

Instead, she expects investors to turn to sectors like energy, industrials, and materials, all three of which she termed as “oversold” and sees “underperformance by these consumer discretionary stocks that so many people have become sort of reliant upon for outperformance and leadership.”

 

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