Consumer Staples vs. Discretionary

I hope everyone had a happy New Years. I spent mine with my wife and some good friends. I’m constantly looking at market relationships, intermarket analysis fascinates me and I think it can give a key insight into determining the ‘health’ of a decline or advance by monitoring market leadership. One of the relationships I follow is between consumer staples and consumer discretionary ETFs. Often during declines in equities we see a relative outperformance in consumer staple stocks in relation to discretionary names. This can show us if traders are positioned for a ‘risk on’ or ‘risk off’ market environment.

During up trends and periods of an expanding economy we normally see discretionary stocks outperform staples as consumers have more flexibility in their spending. The opposite is often true when the economy begins to falter, investors shift back into consumer staples as shoppers spend more of their paychecks at the grocery store and less at Amazon.com or Starbucks.

The below chart looks at the ratio between the SPDR Consumer Discretionary ETF ($XLY) and the SPDR Consumer Staple ETF ($XLP). When the green line is rising it means $XLY is going up more or down less than $XLP, and can be viewed as a sign that traders are potentially taking on more risk within their portfolios – a positive sign for equities.

So while the S&P 500 has come off its recent high of 1446, consumer discretionary stocks have continued to outperform their staple counterparts. The ratio is heading towards its previous high of 1.36, bucking the trend of the major indices. We’ll see if it breaks past this level or if $XLP can begin to gain ground and start outpacing $XLY, giving us a potential sign that traders are starting to take risk off the table.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.