Limited Upside to Consumer Discretionary?

As Corey at Afraid to Trade pointed out in Some Surprising Trend Day Action, one of the more interesting sub-plots in yesterday’s breakout was the strength in the consumer discretionary sector, which rallied 5.8%.

I am firmly of the opinion that the current stock market rally cannot be sustained unless consumer confidence, consumer purchasing power and consumer activity all rally in concert with the markets.

My concern with the consumer discretionary sector extends to a chart of the sector ETF, XLY. In the weekly chart below (click chart to enlarge), the current level of the XLY (33.55 as I type this) is now back to the 32-34 area bounded by the symmetrical triangle formation of 2005-2006 and is also rapidly approaching the 34.08 50% Fibonacci retracement level. Both of these indicators suggest that the XLY should find considerable resistance in the 34-35 area; if this is the case, the market will have to rely on other sectors to continue the current bull rally.

Comments

[gordon:]

Excellent post. Compare it to the $SPX, you'll see the S&P 500 is exactly at the 50% retracement from the March 2008 lows to recent high also.(on a weekly 3-yr, it's @ 62% retracement) I wonder if it's not just the media "hype" about the consumer disc. stocks being "cheap", but the inverse ETFs make a short squeeze easy on any move up? Anyone thinking LOW, HD ,BBBY, etc, are coming back any time soon, hasn't been to a store.

2008 May 03 11:58 AM