The insatiable need to own stocks has manifested itself in most S&P sectors, in which the Consumer Discretionary sector is doing far better than anyone can believe. Most, if not all of the clients we speak with on a daily basis do not understand why this is so; they note that they and and their friends and neighbors have pulled back, as well as deleveraging is the order of the day. Therefore, why then, have we seen 75% move off the low in the Consumer Discretionary ETF (XLY)? Quite simply...liquidity.
But having said this, we think the liquidity is going to slowly, but surely dry up as the animal spirits of the "chase" for XLY come to an end. Traders and investors alike will look around them and ask why XLY is so high, and how did it get there? For us, we find the technicals behind a potential short-trade rather "good" at this point, for prices have rallied back to major overhead resistance at the 50% retracement levels off the lows. Too, prices into 120-week moving average resistance with the 30-week stochastic at overbought levels. This seems to us to be a low risk/high reward setup, but it is really only a matter of short-term timing in which to be short XLY. In our opinion then, lower prices are ahead; with our target a simple 50% retracement of the rally back towards the $22 level.