Consumer Discretionary Sector Finally Reverses Downtrend

Below we have updated our charts highlighting sector relative strength over the last year. In each chart, rising lines indicate periods where the sector is outperforming the S&P 500, while red shaded charts indicate that the sector has underperformed over the last year. Finally, in each chart we have also included red dots that indicate the six Fed rate cuts since August.

After a lengthy period of underperformance, the Consumer Discretionary sector recently broke its downtrend line and has continued to outperform. At about the same time that the Consumer Discretionary sector bottomed, the Consumer Staples put in a short term peak. That sector broke its uptrend line, and now after a short rally, the uptrend line, which previously acted as support, should now act as resistance.

Not surprisingly, the Consumer Discretionary sector also bottomed right about the same time that Energy peaked. As oil ran up to $100, the Energy sector became extended and has since pulled back to its uptrend line which is acting as support.

While Financials have been the excess baggage weighing down this market, the sector recently rallied to break its short term downtrend, but the longer term trend remains lower. After breaking short-term resistance in January, the sector peaked on the day of the most recent Fed rate cut. The only question now is will it hold support?

In January, when we last looked at sector relative strength, we noted the mixed signals the market was giving investors. That trend remains intact today as sectors that are expected to hold up well in a recessionary environment (Health Care, Telecom Service, and Utilities) have been weak, while Cyclicals such as Materials and Industrials are outperforming.

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