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Consumer Staples vs Consumer Discretionary

S&P 500 Equal Weight Consumer Staples (RHS) / S&P 500 Equal Weight Consumer Discretionary (RCD) Technical Study


Ratio analysis is a useful technical indicator to show the relative performances of two securities. This is important as this technical study quantifies the dominant trend of the two securities, and most important can help to determine the turning points (tops and bottoms) between the two securities.


Historically, investors will favor low-beta, defensive, and high dividend yielding sectors such as S&P 500 Consumer Staples when they are defensive or bearish on the U.S. economy (expectation of a recession) and the U.S. stock market (continuation of a bear trend). On the other hand, when investors are optimistic or bullish, they often turn to economically sensitive sectors such as S&P 500 Consumer Discretionary in anticipation of a recovery or expansion in the U.S. economy and U.S. stock market (SPX).


The enclosed S&P 500 Equal Weight Consumer Staples ETF (RHS) to the S&P 500 Equal Weight Consumer Discretionary ETF (RCD) chart strongly suggests that when this ratio peaks this often leads to major SPX bottoms (i.e., Nov 2008/Mar 2009, Sep 2011, Feb 2016, and Dec 2018). Note that during the global financial crisis RHS/RCD peaked on Nov 2008 (2.007). However, it was not until the onset of a lower-high on Mar 2009 (1.954) that this reaffirms a major top in RHS/RCD ratio marking the bottom in SPX (666.79 – Mar 2009).


If we fast forward to 2020 and specifically over the last 3-weeks, it is stunning the RHS/RCD ratio has quickly jumped to 1.97 and is within striking distance of the Nov 2008/Mar 2009 highs (2.007/1.954). So, the question then becomes - is the RHS/RCD nearing a peak? And will a subsequent lower-high pattern reaffirm a major top in the ratio and lead to another major SPX bottom?


Was the 2009 SPX Uptrend Broken or Is this a False Breakdown?


SPX has consistently maintained above its 2009 uptrend over the past 11 years until this month (Mar 2020). As noted on the above analysis, each of previous SPX bottoms coincided with RHS/RCD ratio peaking. Since the RHS/RCD ratio may be nearing another major top and the SPX may be approaching a major bottom does this imply the recent violation of the SPX uptrend may have been temporary or a false breakdown? That is, is the recent Feb-Mar 2020 SPX decline a normal cyclical bear decline, albeit a very sharp and sudden one, and not the dreaded start to the next structural bear market?


Relative underperformance of Consumer Discretionary (RCD) to SPX Equal Weight (RSP)


Equal Weight Consumer Discretionary (RCD) has underperformed Equal Weight SPX (RSP) for the past 4 years. This negative divergence is nearing an important inflection point as evidenced by the sharp decline in the RCD/RSP ratio toward a major test of its 2008/2009 bottoms. Will a bottom in RCD/RSP ratio lead to the beginning of a relative outperformance cycle in economically sensitive sectors igniting the next SPX bull rally?


Momentum Indicator of RHS/RCD


The MACD momentum indicator study on RHS/RCD is trading at the momentum high of 2008/2009 time period. It is extremely rare to see this jump in price momentum in such a short time frame (3-weeks). Momentum type indicators such as MACD tend to peak ahead of the actual price top. So, this technical development may be alerting us to an RHS/RCD price top.



Source: Courtesy of StockCharts.com

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