Consumer Discretionary Sector is Going Down

Friends, it’s time to get hedged, cut your losers, and start swinging for the fences with shorts as our economy goes down.

Our monetary program is founded on the American consumer and those consumers, in addition to recoiling from the sting of inflation, are collectively making less money (by about one half of one percent per month for the last 3 months). 

This means that they have less money to spend on legitimate goods and if you follow the dominoes, that means that the American corporations that sell those goods will not be selling as much product and will not be making as much money as they were.

Companies that rely on our discretionary spending are represented in the Consumer Discretionary SPDR ETF (XLY). Notice how the price broke 5-year support earlier this year and confirming that break Friday:

View the XLY WikiChart on Wikinvest

The U.S. Bureau of Economic Analysis [BEA] issued the following news release Friday:  

Personal income decreased $89.9 billion, or 0.7 percent, in July, in contrast to an increase of $7.4 billion, or 0.1 percent, in June and an increase of $218.0 billion, or 1.8 percent, in May.

The full text of the release on BEA’s website can be found here.

Disclosure: Author holds a short position in XLY

Comments

[jdmiller:]

I right there with you, esp. come December with the American Consumer. Could anyone assist me with the following questions related to this article?

The following well research study by the Anderson business school in UCLA correlates the business cycle and how housing has influenced this cycle since the Depression.
www.anderson.ucla.edu/...
If we fast forward to the conclusion, Pg.51, this is the meat of the doc.

“The temporal ordering of the spending weakness is: residential investment,
consumer durables, consumer nondurables and consumer services before the
recession, and then, once the recession officially commences, business spending
on the short-lived assets, equipment and software, and, last, business spending on
the long-lived assets, offices and factories. The ordering in the recovery is
exactly the same.”

1) Could you match the current “temporal ordering” we are currently blessed with with?
2) Are these “Temporal Orderings” in the right order?
3) From the answer to #1 above, could you assist me with matching the best short fund one could use to optimize their gains by pairing our current a “temporal ordering” with this fund?
4) Is this the best way to inverse the XLY?


My call is that we are in the Consumer Services “Temporal Order” phase and the AMEX:SCC Profunds is the most appropriate short fund to map right now at this time.
Any advice would be appreciated.

Thank you in advance,

FYI - Here is an update from the recent Jackson Hole trip from the above research.
www.kc.frb.org/publica...

-Josh

2008 Aug 31 06:07 PM

[Alan Brochs...:]

Can you please explain your comment that the XLY confirmed its break of the 5-year trend on Friday? I see absolutely nothing to support that statement. Further, I believe that you are seeing the technicals altogether incorrectly. The XLY made a low in July that retraced approximately 74% of the move from the lows of 2001 to the peak in 2007. We have a solid low near 26 now. In my opinion, we are set up for a move to the 50% retracement, implying a test of 33.32 on XLY. In any event, the fall in income was related to the stimulus checks paid earlier in the summer. Year-over-year growth of 4.2% is anemic but quite healthy relative to the 2% growth in 2002. You are rather late to the game in your "domino theory" in my opinion.

2008 Sep 01 09:02 AM

[couldashoulda:]

For future ref. wanted to understand your thinking. XLY broke thru 10 ,50 and 100 day averages recently. P&F technical chart shows considerable recovery . a print of 32 to 33 would be quite bullish. I dont understand your logic.

2008 Sep 01 12:08 PM

[Jake2:]

Tick Talk: You present insufficient data therefore your conclusions are suspect, to say the least. Fuzzy thinking.

2008 Sep 01 03:05 PM

[sbenard:]

In addition, the better-than-expected GDP number was somewhat worse than the headline implied. It was all based upon exports. Now that the Dollar has risen and global spending, especially in Europe and Japan, have tanked, the exports won't give support for future GDP growth. Even worse, the stimulus package is all spent too, so that contribution to GDP will be history also.

2008 Sep 01 07:53 PM

[Tick Talk:]

Alan: Thanks for the question. Quick clarification: The word used in the article was not trend, it was support. Former resistance from 1999 - early 2003 was broken earlier this year, but now that you mention the trend, I'm seeing short term lower lows and lower highs. The 50% fib retracement you hope for is possible, but seems improbable as the shrugging double top in 2007 was confirmed and consecutive retracements appear to be in order. Regarding dominoes and timing, as this is my first article with SeekingAlpha, I'm sorry that a history of my coverage of this issue is not available. I've been bearish this sector since October 06 (I have the losses to prove it). :-) So actually, and somewhat sadly (for me), it was the market that was slow to react to what I was seeing. Stick around, I think you'll find that my analysis agrees with yours more often than not.

2008 Sep 02 01:15 AM

[Tick Talk:]

couldashoulda: You sound like a shorter-term trader. That is awesome. I'll include S/T analysis on the next go-round. Thanks for bringing that up!

2008 Sep 02 01:18 AM

[Tick Talk:]

Jake: Be cool. I tried to keep the article short and sweet in hopes that anyone wanting more details could review the ten-year chart and click the link to the report at bea.gov.

2008 Sep 02 01:24 AM

[Tick Talk:]

sbernard: Great points. I'm nodding in agreement and saying, "yep, he gets it."

2008 Sep 02 01:27 AM

[Tick Talk:]

jdmiller: I like the report. In fact, I was sold that same bill of goods from my Alma Mater. All in all, I'll bet that most of us like to think that there is order in economics. However, I have yet to see national money matters follow any such continuum. Our leaders are different, the populace is different, our global influence/susceptibili... is different. While there is the adage that those who do not learn from history are apt to repeat it; there is no guarantee that those who understand history won't make bigger mistakes. Oh, if business schools are so smart, why don't they publish a handbook for avoiding the ups and down? In summary, backtesting is 20/20, but successful fronttesting (just made that word up) belongs to those who comprehend past, present and future.

2008 Sep 02 02:01 AM

[John C. Lee:]

what's your anticipated holding period? So far, the 200-day MA has held nicely as resistance for the past 9 months.

2008 Sep 02 08:38 PM

[Tick Talk:]

WeeklyTA: Yeah, the 200-day SMA is the old stand-by and a good reference point. The fib time series for this issue in the intermediate/long term prognosticates a holding period through June of 2010. Thanks for the question. I'll address that in future articles.

2008 Sep 03 12:56 PM

[baraness:]

This is without a doubt -- the best thing you have ever written. Well done!

2008 Sep 12 09:02 PM