Consumer Discretionary Sector Deep Dive
The Consumer Discretionary sector is holding where it needs to.
We discussed a make-or-break level for the S&P 500 Index earlier this week, and so far the benchmark index has managed to remain above that key level. The same can be said about the Consumer Discretionary sector.
Since reversing a sharp breakdown at the outset of 2023, Discretionary stocks have been some of the best performers of the year. The sector is one of just three to outperform the S&P 500 year-to-date. However, two attempts to break out above the highs from last August both failed. That set off a 15% decline, bringing the sector all the way back to the top end of the spring trading range, which is also the 138.2% Fibonacci retracement from the entire COVID decline.
We’re watching to make sure the sector can hold that key level and keep this year-to-date uptrend intact. A break below it would have us concerned about the future of the sector and stocks overall.
When compared to the S&P 500, Discretionary stocks have already fallen back below the highs they set back in February and have broken the uptrend line from the December lows. This ratio hasn’t deteriorated to the extent that we want to be betting on further relative declines, though. That would take a break below the swing lows from April, which were also a key low back in May 2022. For now, we’re neutral towards the sector with a bullish bias - a move back above those February highs would have us looking for further outperformance.
Fortunately for bulls, November is the single best month for stocks, and it’s especially good for the Consumer Discretionary sector. Since 1990, Discretionary stocks have gained 2.6% on average during the month.
And compared to the performance of the S&P 500 index, the sector has outperformed by an average of nearly 0.7% during the month of November, on par with its other two best months, January and March.
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That doesn’t mean we’re out of the woods. Seasonality is a tailwind, but it’ll have to overcome weakening trends beneath the surface. Nearly 80% of stocks in the sector are in short-term technical downtrends, and two-thirds are in long-term downtrends.
That internal weakness has the equally weighted Consumer Discretionary sector solidly in the ‘Lagging’ quadrant of the weekly Relative Rotation Graph.
And that equally weighted sector just hit its lowest levels of the year.
The 2018-2020 highs should offer significant support on further declines, but this isn’t a chart you’d describe with the word ‘uptrend’. Rangebound is more like it. And as long as that’s the case, it’s hard to bet on Discretionary as a leader for anything more than a few weeks at a time.
A new leader is arriving to the scene while a familiar laggard has returned.