U.S. Consumer Remains a Key Indicator for Markets

| About: Consumer Discretionary (XLY)

Over the last three years the consumer has been pronounced 'done' more than any other sector of the economy. Yet, the consumer finds a way to survive and keep the economy moving forward. The fourth quarter was all about the economic recovery and the consumer rising from the ashes of the 2008 financial crisis. The numbers did show some improvement, but they remain below the elevated expectations. The iShares Select Consumer Discretionary ETF (NYSEARCA:XLY) shows the indecision in the sector since early December, as defined by the narrow trading range near the current high.

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The index is a composite of the auto manufacturing, auto parts, consumer durables, apparel, hotels, restaurants, leisure, media and retail sectors. The largest being the retail stocks, used by many as a barometer for the health of the economy. The narrowly defined trading range is in need of a catalyst if the upside is to continue short term.

A catalyst in direction is likely to come from earnings in the retail stocks. However, they don’t report until the week of February 21st, when the bulk of department stores will be announcing. This week some restaurants, which are a component of the consumer discretionary index, could give some insight into the consumer's discretionary spending as they announce earnings. A move higher on volume would be a positive sign for the sector as well as the broad markets. Thus, they are on my watch list for the week.

McDonald’s (NYSE:MCD) announced earnings Tuesday and they were in line with expectations. The stock traded slightly higher. One piece of data worthy of note was that McDonald's planned to raise prices. This is a reaction to the rise in food costs at the producer levels. Both the Producer Price Index and the Consumer Price Index have shown an increase in food costs. The ability to pass on these increases to the consumer will be a key indicator for the economy as well as the consumer. The discount component of the restaurant sector will be a good barometer of things to come.

Coach (NYSE:COH) will announce earnings. The company represents the high end retailer and the data will be seen as an earlier indicator for those stocks. Harley Davidson (NYSE:HOG) was out with earning Wednesday as well as for the auto manufacturing component. Netflix (NASDAQ:NFLX) is on Wednesday and will be watched relative to the consumer, but also relative to the impact of competition on their core business. The balance of the week data from U.S. Airways (LCC), JetBlue (NASDAQ:JBLU), Royal Caribbean (NYSE:RCL) and Columbia Sportswear (NASDAQ:COLM) which will offer more insight for the sector.

Stocks to watch in this space are Amazon (NASDAQ:AMZN), which fell below the 50 day moving average yestday. Stanley Black & Decker (NYSE:SWK) earnings on Thursday, Newscorp (NASDAQ:NWSA) broke above resistance at $15 establishing a solid move higher, and McGraw-Hill (MHP) and The New York Time (NYSE:NYT) are showing strength in the media sector as well. Lennar Homes (NYSE:LEN) and D.R. Horton (NYSE:DHI) have been leading the home-builders sector with Marriott (NYSE:MAR) and Starwood Hotels & Resorts (HOT) leading the hotels.

Scanning the stocks in the sector ETF shows opportunity, the question mark is sustainability of the uptrend in play. Earnings will be the catalyst good or bad. Watch for the break from consolidation and take advantage of the resulting move. Momentum is to the upside and a break aboe the $38 level on above average volume would be the level to watch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Jim Farrish is the Founder and Editor of SectorExchange.com and CEO of Money Strategies, a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.