Since the beginning of the year, the market "Generals" if you will have been the S&P Consumer Discretionary, S&P Financial and S&P Industrial sectors given they are the only sectors to have out-performed the S&P 500. However, there is only one sector that has out-performed in both 2009 and 2010 - the S&P Consumer Discretionary sector. This is obviously counter-intuitive given the enormous de-leveraging occurring in the US economy and in particular with the US consumer - although recent retail reports simply haven't proven this to be much of an issue. Be that as it may, with the broader market seemingly ready for a correction, we think the consumer discretionary stocks are primed to be the leaders on the downside.
If we step back and take a long-term look at the sector, we find that since the March-09 bottom, prices have rallied a mere 117%. But more importantly from a technical position, we find prices towards the upper end of their range of the past 13-years, with the 9-month stochastic overbought, with the percentage above their 30-month moving average trading at 20%. In the past, a 20% reading has coincided with a correction of some magnitude. Hence, there is certainly absolute as well as relative risk in the consumer discretionary space, which we would posit is in for a corrective period of several months in the least back towards its 30-month moving average...or a potential decline of roughly -20%.
That being said, if money exits the consumer discretionary space, then we're likely to see it re-enter another space. Our preferred choice for this rotation is the S&P Energy sector...which has lagged both in 2009 and 2010. It is simply energy's turn for sponsorship...especially when one considers they ratio between the S&P Energy sector and crude oil prices is at long-term historical support.
