Another Rung In The Bull Market Yanked Out

Tyler Durden's picture




 

Via Dana Lyons' Tumblr,

The relative strength of the consumer discretionary sector versus consumer staples had been a positive for stocks – not anymore.

Some folks like to accuse us of being perma-bears, or at least one-sided when presenting market insights. Nothing could be further from the truth. Our only mission is to make and protect our clients’ assets. Therefore, our focus will go wherever the data leads us. It just so happens that the preponderance of data over the past 8 months, in our view, has been tilted to the bearish, or “risk” side of the equation.

That said, we have been willing suppliers of bullish indicators when we’ve come across them. Since May, these have primarily been found in shorter time-frame data points. One longer-term positive that has persisted, however, is the relative ratio between the consumer discretionary sector versus the consumer staples sector.

The story goes that, when discretionary stocks are leading, it is perhaps an indication of a healthy consumer in the economy, and/or that the investor community is comfortable taking on risk. Conversely, when the defensive staples sector is leading the way, it connotes the impression that investors, and possibly consumers, are assuming a “risk-off” posture.

Whether that is sound reasoning or not, prices do historically support the theory. When stocks are in the midst of a bull market, the discretionary:staples ratio tends to slope up. On the other hand, during risk-off periods (e.g., 2000, 2007-2008), the ratio has clearly pointed lower.

Over the past year, the ratio, as measured by the Consumer Discretionary SPDR ETF (XLY) versus the Consumer Staples SPDR (XLP) has exhibited mostly positive behavior. This has, in our view, been a positive consideration for stocks over that period. We pointed out such bullish developments in posts in May and December.

Although, in the December post, we did point out a very relevant asterisk regarding the ratio. The XLY was climbing on the backs of only a few mega-cap names (e.g., Amazon). Indeed, using the equal-weighted versions of the two sectors, we found discretionary stocks at a relative 4-year low. That said, as recently as November, the XLY:XLP ratio was breaking out to all-time highs. On the margin, we considered that a bullish factor for stocks. Not anymore.

As the chart below shows, the November breakout in the XLY:XLP ratio was short-lived. It has since dropped to an 8-month low in forming an apparent false breakout.

image

 

So is this a death knell for the bull market? Not necessarily. There are obviously numerous other factors that will weigh on the market’s direction at least as heavy as this one. However, for a bull market with a dwindling list of positives on which to hang its horns, this additional negative development is most unwelcomed indeed.

There are precious few support rungs left to lose before this market finally goes Kerplunk!

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More from Dana Lyons, JLFMI and My401kPro.

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Wed, 01/06/2016 - 13:44 | 7005767 zorba THE GREEK
zorba THE GREEK's picture

Soon they will call buying food discretionary. 

Wed, 01/06/2016 - 14:32 | 7005785 KnuckleDragger-X
KnuckleDragger-X's picture

Well after all, nobody is forcing you to eat. Soylent Green is the new cool thing coming real soon now......

Wed, 01/06/2016 - 13:44 | 7005768 fourZero
fourZero's picture

PPT engage!

Wed, 01/06/2016 - 13:49 | 7005782 Dr. Engali
Dr. Engali's picture

The bull(shit) market died along with QE. The bull(shit) market will come screaming back with QE4.

Wed, 01/06/2016 - 13:51 | 7005791 KnuckleDragger-X
KnuckleDragger-X's picture

The Walking Dead, starring Wall St. and the mega-banks......

Wed, 01/06/2016 - 14:13 | 7005884 Consuelo
Consuelo's picture

+++

Screaming back it will, with an (inflationary) vengeance...

Wed, 01/06/2016 - 14:11 | 7005877 Consuelo
Consuelo's picture

"Our only mission is to make and protect our clients’ assets..."

 

Remedial translation:

'Our only mission is to make ($$$Fees) and protect our (cash cow) client's ability to service those $$$Fees'...

 

Sorry, my cynicism towards the Financial Services Industry always seems to get the best of me, no offense to Mr. Lyons...

Wed, 01/06/2016 - 16:28 | 7006679 TheDanimal
TheDanimal's picture

Suppose there may be a great number of idiots out there who will skimp on staples to afford discretionary.  That sounds pretty American to me.

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