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Sector Analysis - Week Ending Sept. 23, 2016 - Utilities And Consumer Discretionary In Focus As Q4 Looms.

|Includes: XLB, XLE, Financial Select Sector SPDR ETF (XLF), XLI, XLK, XLP, XLU, XLV, XLY

Overview: Absolute and Relative Sector Performance

All four of the economically-sensitive (aggressive) sectors - Cyclicals, Financials, Industrials, and Technology - finished positive for the week on an absolute basis. It was good to see all of the aggressive sectors finish positive as we head into the final week of the seasonally worst month of the year (September).

(Weekly Absolute Performance -

On a relative basis - using the S&P 500 as the benchmark - it was a split decision. Cyclicals and Industrials finished positive, Financials flat and Technology negative.

(Weekly Relative Performance -

Month-to-date the only aggressive sector in the black is Technology. The Financial sector has struggled all month, pressured by uncertainty regarding the impending FOMC decision on a September interest rate hike. Last week the Federal Reserve stood pat on a rate increase. The market rallied and so did the Utility sector.

(Month-to-Date Performance -

Insights: Utilities and Consumer Discretionary Sectors in Focus

The Utilities sector has outperformed all other SPDR sectors year-to-date (+20.57%). The Fed's decision to keep rates at near zero has created an environment in which "dividend-paying stocks are the new long-term bonds" (as reported by Barron's this weekend).

(Year-to-Date Performance -

Consumer Discretionary (Cyclicals) has been a laggard all year. I have reported in previous blogs why this is a concern. Consumer spending represents two-thirds of the economy (as we all know).

Tom Bowley (Technical Analyst at Stockcharts.com) uses the relative ratio of Cyclicals versus Staples as a measure economic strength. This is best illustrated by charting the relative strength of the Consumer Discretionary SPDR ETF (NYSEARCA:XLY) versus the Consumer Staples ETF (NYSEARCA:XLP).

An uptrend in this ratio represents a strengthening economy; a downtrend represents weakness (contraction). The following monthly chart shows there is a negative divergence forming with the XLY:XLP (downtrend) and the S&P 500 (uptrend) since late 2015.

(Negative Divergence Forming -

October through December are historically strong months for the Consumer Discretionary sector. It will be interesting (and informative) to watch if this divergence plays out and stalls the market's advance. The alternative (bullish) case is for seasonality in consumer discretionary to kick-in, supporting the S&P 500's uptrend.

Summary:

  • Utilities are still the strongest sector, year-to-date and month-to-date.
  • Utilities are a proxy for the bond market.
  • Utilities continue to telegraph that interest rates are not rising soon.
  • A low-rate environment continues to support dividend stocks.
  • Weakness in the XLY:XLP ratio supports the Fed's caution (no wage inflation).
  • Q4 represents the strongest quarter for the consumer discretionary sector.
  • Barron's reported the previous week that fund managers are stockpiling cash.
  • Perhaps this is a "perfect storm" for a potential market rally into the year end.
  • Keep an eye on strength in the Cyclicals sector going into October.

Thanks for the read…

Previous Instablog's for Reference:

Sector Analysis - Watching Financials & Utilities Ahead Of Fed Day / AMZN Revisited - Week Ending Sept. 16, 2016.

Sector Analysis - Week Ending Aug. 26, 2016 - Consumer Discretionary Bears Close Watching.

Market Sector Analysis - Week Ending Aug. 12, 2016 - A Lot To Keep Your Eye On As Summer Wanes...