ETF Insights| November 1, 2024 | Consumer Discretionary Sector
Price Action & Performance
Price broke out to new all-time highs for XLY on September 18 forcing us to close our tactical short on the sector and move to an overweight position. The month of October saw some backing and filling at the sector level until October 23 when TSLA posted a big beat and raise. The report catalyzed the sector to move higher and has the MACD oscillator on a buy signal as we enter November with no overbought conditions present.
At the Industry level we still aren’t seeing the kind of participation we’d like to with only 2 of 9 Discretionary industries outperforming the S&P 500 over the past 6-months. On the constructive side of the ledger, Automobiles have been leadership along with Household Durables, and Multi-line and Specialty Retail have been close to market performers. Weakness has been concentrated in Auto Components, Textiles & Apparel and Distributors which are all among the worst charts in the S&P 500. Hotels, Restaurants and Leisure names are showing the most near-term improvement while Household Durables are being sold.
At the stock level we are still seeing a lot of challenged charts. Cruise lines have been unexpectedly strong with CCL, RCL and NCLH all buy rated in our work along with BKNG and EXPE. Automotive Retail continues to fade and homebuilders are getting sold as interest rates back up. We are constructive on Mag7 members AMZN and TSLA as we expect they will continue to work as long as the bull market can sustain.
Economic and Policy Drivers
The most pivotal driver of Consumer Discretionary Sector performance into year-end is likely to be the level and direction of interest rates. Consumer stocks have consolidated while Yields have moved from 3.6% to 4.3% over the past month and a half. Now at chart resistance, the next move for Yields will be key. We are expecting them to move lower based on the behavior of Commodities prices, but the initial wave of investor positioning after the Fed’s big announcement in September is working against policy goals and occluding the picture in the short-term.
Now that the bond market is no longer cooperating with the Fed’s policy goals, we will likely be dealing with this new tension moving forward. We will remain skeptical of rising rates until we see Commodities prices responding in kind with a move higher.
We are a week out from the Presidential Election. At the risk of oversimplifying it, both candidates have somewhat inflationary policy proposals before the American people. Historically equity investors often show more excitement for the Republican candidate in the lead-up to elections, but in my past life I researched the outcome of every election since 1946 in the context of party and control of congress, and what we found was the results are nearly identical regardless of party. The only material difference occurs in year 4 of the presidential term and over the period studied, the modest advantage accrued to the Democratic party. The key takeaway is that the hype surrounding elections had a huge impact on actual outcomes.
In Conclusion
XLY has started to benefit from the change in Fed policy and outlook. It has shown some technical improvement over the previous 3 months, and we have seen our buy signals triggered. We start November with an OVERWEIGHT position of +1.58% in XLY vs. the S&P 500 weight in our Elev8 Sector Portfolio.
Chart | XLY Technicals
- XLY 12-month, daily price (200-day m.a. | Relative to S&P 500 |MACD|RSI)
- Slowly progressing through a bullish reversal that started in August
XLY Relative Performance | Industry Level Relative Performance | 3m
Data sourced from FactSet Research Systems Inc.
