Relative Support For Consumer Discretionary Stocks

Mar. 09, 2022 8:36 PM ETXLY, VCR, RXI, RCD, PEZ, FXD, PSCD, FDIS, JHMC, IEDI, IYK
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Summary

  • US Consumer Discretionaries have fallen back to old support relative to Staples.
  • A broader picture also shows a correction to a prior congestion zone for *global* Consumer Discretionary stocks.
  • While a bearish downtrend remains intact, traders should monitor these intermarket trends for the potential of a relief rally in risk assets.
  • Indeed, whether or not we are truly in a bear market now, you can still see very significant short-sharp rallies (particularly when sentiment is extreme).

Overhead image of people buying in the large supermarket

lechatnoir/E+ via Getty Images

Consumer Discretionary stocks have gotten slammed this year. The sector is among the “growthiest” out there. Companies in the Staples sector have performed relatively well amid a sharply risk-off trading environment over the last several months, too. But could there be a ray of hope for Discretionary bulls? We spotted two relative charts that make the bullish case, if even just for a short-lived relief rally.

Cautious on Risk Assets, But Near-Term Relief Possible

To be clear, we are treading cautiously on stocks right now. In fact, we favor bonds over stocks over the intermediate term. From a risk management point of view, however, it can be helpful to review where we might be wrong. If we see support come into play for risk-on sectors, such as Discretionary, then that could help spark at least a relief rally in equities.

A Domestic Risk Perspective

The first chart shows US Consumer Discretionary stocks relative to US Consumer Staples companies. The ratio graph displays a blow-off top in early 2022 as high-flying growth names experienced a final buying surge while safety plays were cast aside. The narrative flipped quickly over the ensuing months.

Discretionaries reached bear market territory off their early 2022 peak, and just 8% of the sector’s members trade above their 200DMA – the lowest since April 2020. Relative to Staples, which are in the black since last November, Consumer Discretionary is off by more than 25%. So where is the silver lining here? Well, if we go back to 2018, we find that the ratio chart peaked near 1.7x then. That is precisely the level today. Could former resistance be current support? It’s something to watch as sentiment has become distinctly one-sided.

US Consumer Discretionary Sector vs. Consumer Staples: Nearing Support?

US consumer discretionary vs consumer staples

Topdown Charts, Refinitiv Datastream

An Ongoing Bearish Trend Around the World

Next up is a global perspective. Consumer Discretionary peaked in the second quarter of 2021. The pullback is about 20% so far. Like the first chart, relative price action has fallen to old support. Versus the All-Country World Index (ACWI), Discretionaries ranged from 0.40x to 0.43x during the 2015 to mid-2019 period. Here we are again. Will the polarity principle—the notion that old support returns as new resistance—reveal itself? At the very least, there is a large amount of congestion at these relative levels that might entice some buyers.

Global Discretionary vs. Global Stocks: A Return to the 2015-2019 Range

chart of global consumer discretionaries relative performance

Topdown Charts, Refinitiv Datastream

Bottom Line

These two technical ratio charts are just one way to analyze global equities right now. Risk appetite has fallen precipitously – arguably over the last year. The Consumer Discretionary vs. Consumer Staples relative chart is a common method to assess the health of the market. For now, there is a clear bearish downtrend in place over the last few months (USA) and the last year (global). A small silver lining for bulls is that both charts have fallen back to old resistance which might just be technically significant.

This article was written by

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Topdown Charts is an independent research firm covering global asset allocation and economics - bringing a chart-driven, top-down approach to investors.  -->> Check out our new entry-level service: https://topdowncharts.substack.com/--We take a top-down, global multi-asset perspective to deliver:Actionable investment ideasRisk management inputMeaningful macro insightsCharts to use in your own work--Our clients include Pension companies, RIAs, Hedge Funds, family offices, insurance firms, and wealth managers and Investment Consultants.--Sign up for exclusive insights:  https://topdowncharts.substack.com/===================================================

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. I have no business relationship with any company whose stock is mentioned in this article.

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