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Narrowing breadth for the consumer discretionary sector

November 29, 2015

I heard recently that most of the recent gains in the SPDR Consumer Discretionary (XLY) came from just six stocks. That prompted a look at the breadth readings for the ETF.

SPDR Consumer Discretionary (XLY) and % above 200 day moving average

XLY200MA

The chart shows some previous divergences that have led to turning points. Note that divergences don’t give the timing of the turn.

A divergence has been building since 2013 but since February 2015, this has become much more pronounced, making it worth greater attention.

In late February 2015, there were 84% of XLY components above their 200 day moving average. In fact, that had blown away the shorter term breadth divergence at the time. Now, only 47% of components are above their 200 day moving average.

Conclusions

The breadth divergence makes the sector more vulnerable to a set-back

As this sector has been one of the few holding the market indices up, this makes those indices more vulnerable

Periods during which divergences build are better for pairs trading within the sector, as there are more opportunities to spot diverging performance

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