Since I penned my September 20th BI article entitled, The Action in Home Depot and Starbucks Suggest Now is Not the Time (for the Fed) to Raise Rates, Home Depot (HD) is up 0.9%, while Starbucks (SBUX) is up 1.5%. The cash SPX is up 0.7%, indicating that in the aftermath of the Fed’s reluctance to make good on its intensifying threat to hike rates on September 21st, the consumer stocks are acting relatively strong, albeit in a constrained sort of way, given the sideways to lower price action in HD and SBUX for the entirety of 2016.
In that the holiday shopping season is just ahead, let’s take a closer and broader look at the technical set up in The Consumer Discretionary Sector (XLY), as well as a handful of its big cap constituents to try to get a sense about the health of the consumer entering Q4, 2016.
One look at my 2009-Present, weekly bar chart of XLY, the Consumer Discretionary Sector SPDR ETF, representing 13% of the larger SPY 500 benchmark ETF, shows that the dominant 8-year uptrend off of the post-Financial crisis lows remains very much intact. XLY outperformed all of the major sectors of the SPY for many years after the 2009 bottom, and has a 20% annualized return over the past 5 years.
However, during the past year, it is the worst performer of the 10 major SPYDR sectors. Let’s notice (on the chart) that since its August 2015 high, XLY has not done very much on a net basis. In fact, XLY is down 1.1% from the high it established on 8/05/15, and is down 3.2% from its all-time high of 82.38 hit on 8/15/16. To put a fine point on it, XLY—the sector that gauges the discretionary health of the U.S. Consumer names-- has been spinning sideways for the past 14 months.
While prices have been spinning sideways, the price pattern has been carving out a Rising Wedge Formation, which in English means that XLY has established a series of higher pullback lows that are juxtaposed against a series of horizontal highs (see Red Circles at the top of the enclosed chart). The fact that the horizontal highs are accompanied by lower WEEKLY Momentum Readings (see Red Circles at the base of the chart) is a potentially problematic condition for XLY, and is a BIG WARNING SIGNAL to investors that the underlying health of the consumer discretionary names is suspect. Rising Wedge Formations usually are trend-ending patterns, and in that the XLY bull market is already 8 years old. Inability of XLY to remain above its September 12 th pullback low at 78.03 will inflict damage to integrity of The Wedge, and leave XLY vulnerable to a very serious breakdown.
Before leaping too far to conclusions about the health of the consumer sector—ahead of quarterly earnings, a presidential election, two Fed Meetings before year-end, the Christmas shopping season, all amid oil prices that are double the price from a year ago-- let’s look under the hood of the XLY at some of the major components of the ETF to see what a few of the individual chart set-ups look like.
My enclosed comparison chart of AMZN, HD, DIS, SBUX, and MCD is eye-opening for at least two reasons: 1) AMZN, which represents 14% of the entire XLY, remains singularly the most bullish component of the enclosed big cap consumer discretionary names, and as such, is largely supporting the XLY, and must perpetuate its dominant position into and after earnings are released on October 20th if XLY stands any chance of preserving the integrity of the lower support boundary line of its Rising Wedge Formation, and 2) the other names, HD, DIS, SBUX, and MCD all are in the process of rolling over from neutral to bearish trends, trading below BOTH their 50 and 200 Day EMAs heading into earnings season.
With the exception of AMZN, and perhaps PCLN as well, many other Consumer Discretionary names across a wide swath of the sector like NKE, TJX, F, MAR, and CCL to mention a few, all appear to be suffering from varying degrees of technical distress.
If U.S. GDP depends on a healthy consumer for 70% of its performance, then the technical hints we see in the XLY and in some of its big components, are unsettling at best, and at worst, warning us that consumer discretionary spending is nearing exhaustion after a multi-year recovery.
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