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Consumer discretionary sector may soon end its outperformance

March 24, 2014

The S&P 500 Consumer Discretionary Index has outperformed the S&P 500 Index throughout this bull market. In fact, turns in its relative strength have led the market index since early 2007. There is now the first signs of that outperformance ending.

S&P 500 Consumer Discretionary Index v S&P 500 Index

DISCSPX AND ERSA

The sector outperformed until the end of 2013 but with RSI and Performance Rank (PR) divergences having developed since July 2013. The PR is a rank of the price performance over 100 days of a list of US sector indices.

There were also divergences in late 2010 which led to a pause in the uptrend but the current divergences are more pronounced.

Moving average crossover chart

DISCSPXMACD

The other difference this time is that the divergences coincide with a pending long term moving average crossover.

  • The 12 and 26 week moving averages last had a bullish crossover in December 2008 and have maintained bullish alignment since
  • That meets the criteria for MA crossover set ups of at four years since the last cross
  • Although there has been a form of divergence since 2010, this is the first divergence within a peak, forming since August 2013
  • The crossover is near (when the MACD crosses the zero line), which will be final confirmation

Daily chart

DISCSPX AND RSI DAILY

  • The high at the start of 2014 came according to my RSI divergence criteria – weekly divergence along with daily divergence that forms first above 70, then below 70
  • If the relative breaks the 03 February low (dashed line), it may form a bullish daily RSI divergence
  • This could coincide with the long term moving average crossover being confirmed

Summary

The consumer discretionary sector looks set to end its long term outperformance. Just like with the S&P 500 Restaurants sector though, the moving average crossover signal is not a good timing tool, just a long term indicator. Wait for any daily RSI divergence to unwind before opening a relative short position in this sector.

I’ll keep monitoring these charts and providing updates.

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One Comment
  1. Hi, I read your blogs like every week. Your writing style is witty, keep up the good work!

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