In evaluating the likelihood of sustainable market rallies, one key relationship revolves around how consumer discretionary (XLY) stocks are performing vs. their consumer staples (XLP) counterparts. The reason is fairly simple. Consumer discretionary companies sell products that people WANT while consumer staples companies sell products that people NEED. If the stock market looks ahead and sees a bright economic future, consumers tend to spend money on things they want. So it's quite typical to see the S&P 500 moving higher with an XLY:XLP ratio that is rising as well. But when uptrends in the XLY:XLP ratio occur, the benchmark S&P 500 will many times suffer. The chart below will show that a rising ratio of the XLY:XLP tends to be very good for your portfolio while breaks in that uptrend tend to lead to sideways action in the S&P 500 - or downright bearishness. It's difficult to say which is upon us right now, but the fact that the XLY is now underperforming is no big secret. Also, we're in the historical bearish period from mid-July to late-September so protecting your capital is paramount. Check out the chart:
Happy trading!
Tom
