XLY: Put This On Your Watch List
Summary
- The macroeconomic backdrop is positive.
- The ETF is likely consolidating gains.
- Put this on a watch list for now.
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While the macroeconomic backdrop is positive, the ETF is consolidating gains, which will likely continue for a bit. Keep this on your watch list for now.
Introduction: the (NYSEARCA:XLY) is one of a series of ETFs issued by State Street Investors that track a broad economic sector, which here would be the consumer discretionary sector. The XLY is the largest consumer discretionary sector-tracking ETF.
This article will first look at the macroeconomic backdrop of the consumer discretionary sector. A growing consumer discretionary sector translates into rising profits for companies that produce products for this sector, which, in turn, increases company valuations, and, hence, share prices. The reverse is also true.
Consumer discretionary companies require a healthy consumer, which, in turn, is based on a healthy labor market. Overall, the jobs market is in good shape:
From the FRED system
Total establishment jobs have regained about 80% of their pandemic losses (left). The monthly pace of job growth is still positive, although it has slowed (right).
From the FRED system
The U-3 unemployment rate (in blue) is 4.2% -- a remarkably low rate and a very quick bounce back from the highs printed just after the recession ended. The broader U-6 rate (in red) 7.8%. Just before the recession, it was 7%.
From the FRED system
The total number of job openings is just shy of a series high. Also note that the current level is far higher than the levels just before the pandemic.
From the FRED system
However, the labor force participation rate (left) and the employment/population ratio (right) are still at low levels. There are two ways to read this data. The bearish analysis is that it indicates weakness, as there are still a large number of people who are unwilling to work. The bullish argument is that both are moving lower since the start of the 2000s due to the wave of baby-boomer retirements. If this is accurate, it means that the labor market is indeed tight.
Wage data indicates the labor market is indeed tight:
From the FRED system
Employee compensation (left) has continued to rise at a sharp pace. The Y/Y percentage change in compensation (right) is just shy of 10%.
Higher wages have stimulated spending:
From the FRED system
Real retail sales have increased sharply.
From the FRED system
The above chart shows personal consumption expenditures for durable goods (in blue), non-durable goods (in red) and services (in green). The chart converts the data to base 100 and uses the start of the last recession as 100 for each data series. The chart shows that spending on durables and non-durables rose quickly after the end of the recession, while spending on services has just recently returned to pre-pandemic levels.
Economic conclusion: the macroeconomic backdrop for the XLY is positive. The labor market is tight, which has increased wages. This, in turn, has become consumption, which is evident in the retail sales and personal consumption data.
With a positive economic backdrop, the question then becomes, "Are the XLY charts telling us this is a good time to buy?"
Let's start with a longer-term perspective:
2-year (left) and 1-year (right) chart of the XLY from Stockcharts.com
The weekly chart (left) is bullish: prices are rising, all EMAs are moving higher, and the shorter EMAs are above the longer EMAs. However, the 1-year chart (right) shows that prices may have printed a short-term buying climax (see area in the rectangle). There's an uptick in volume and prices have been trending lower since hitting a peak in early November.
3-month (left), 30-day (upper right), and 2-week (lower right) chart of the XLY.
The idea of a buying climax a top. But the 3-month chart (left) doesn't have a clear topping pattern -- head and shoulders, double top, etc. None is apparent on the 30-day (upper left) or 2-week (lower right) chart. That doesn't mean a short-term top isn't in. But it does make it a bit harder to argue that we are seeing a top.
So, is this a time to buy? Not yet. It doesn't look like a top is in. But, it seems likely that additional consolidation is likely as the ETF consolidates gains. Put this on a watch list for now.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (4)
Consumer staples are better but still unimpressive.