Stock Market Sentiment: Discretionary Vs. Staples

Includes: SPY, XLP, XLY
by: Julian Marchese

It should be pretty commonplace that consumer discretionary stocks are typically viewed as an aggressive sector and consumer staples stocks are viewed as a defensive sector. Using these two points of knowledge, we can develop the thesis that if stock market internal sentiment is doing well, consumer discretionary (XLY), should out perform consumer staples (XLP). However in recent times, this relationship seems to not be the case, as expressed by the chart below.

(Click to enlarge)

(Chart Courtesy of

The upper pane of the chart above is the ratio between consumer discretionary and consumer staples . In other words, if the ratio is rising, discretionary is out performing staples, and vice versa. The lower pane of the chart shows the S&P 500 (SPY). Notice how since the recent rally started in stocks (beginning of June), the consumer discretionary sector has actually failed in out performing staples, indicating that investors still feel an allocation to defensive sectors is needed. The gives me slight concern in the integrity of the rally we have seen in stocks over the past 2 months.

Historically, the ratio between consumer discretionary and consumer staples has been quite effective in predicting / timing broad market tops and bottoms. The chart below shows a longer timeframe example (early 2006 to present) of the ratio plotted on the upper pane, vs. the S&P 500 on the lower pane.

(Click to enlarge)

(Chart Courtesy of

Notice how the ratio between and was able to predict broad market tops and bottoms, months before the actual reversal. This is a very powerful sentiment tool that definitely should be part of the investor's arsenal.

Bottom Line

Consumer discretionary stocks have been under performing consumer staples stocks as of late, indicating a weak internal market sentiment. This leads me to believe that the latest rally may not have much steam going forward and thus I am bearish stocks in the short-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am currently slightly short U.S. equities, however my positions change frequently.

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