The relationship between Consumer Discretionary (and its big Amazon component) and Consumer Staples is an indicator on risk tolerance vs. defensive behavior in the stock market. Much like we did with the Semi Equipment leadership (another of our many ‘internals’ indicators) failure a year ago, we used XLY/XLP as a gauge of worsening market behavior for the risk ‘on’ contingent.
We used these XLY/XLP charts in NFTRH to view a weakening and breakdown as the market shifted defensive after the long summer grind upward to test and exceed the January high (SPX). As you can see, the trend is completely broken and reversed on the weekly chart. What’s more, I expect that 2019 is going to see this ratio back at the ‘Trump rally’ support area along with many other sectors, indexes and ratios.
The daily chart was used as well to get an up close view. It is in a bounce stance and logical resistance is clear for this broken risk ‘on’ ratio.
I bring these old charts up because Tom McClellan has an article (published at Biiwii) that updates the situation to today from the perspective of an oversold ratio.
By the time that the SP500 made its twin bottoms on Oct. 29 and Nov. 20, the relative strength ratio had fallen so far below its 50MA that it was actually showing a huge oversold condition. This indication can best be seen in the next chart, which shows an indicator measuring how far the relative strength ratio has moved away from its 50MA:
McClellan ends with this, but check out the whole article for context.
With that extreme low posting now yielding to an upturn for this indicator, the message is that the flight out of Consumer Discretionary was so extreme that it just about cannot get any worse. So that means it should only be able to get better (unless the sky really is falling).
Personally, I believe the sky is falling (to the green shaded support on the weekly chart above) but that the sky is likely to rise a bit first. Regardless, the XLY/XLP ratio is one many indicators in the Market Internals segment because nominal charts are fine, but the indicators are what fill in the blanks and refine probabilities all along the way. While specific timing is an issue with most indicators, this one joined the Semi (and later Tech) leadership abdication as important ones leading the October market correction.
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