A Look at Relative Strength of Staples and Discretionary Oct 4

Oct 4, 2009: 7:37 PM CST

With a new week before us, and a strong rally since the March lows in the S&P 500, let’s take a quick look at the “Relative Strength” lines of both the “offensive” Consumer Discretionary/Retail Sector and the “defensive” Consumer Staples sectors in relation to the S&P 500.

What we have here is the S&P 500 year to date, and underneath that, the “relative strength” line of the Consumer Staples (XLP) ETF (vs the S&P 500) and then in the bottom panel, we have the Consumer Discretionary (XLY) ETF also vs the S&P 500.

This gives us a way to measure “Relative Strength” (the concept, not the indicator) in relation to the S&P 500 – and to an extent, to each other.

Think of these two ETFs as opposites – the Discretionary/Retail ETF outperforms other sectors when the market is stable and rising and in a bullish position, while the Consumer Staples outperforms when the market is struggling or declining, or in a bearish position.

It’s one way to look under the market hood for clues.

What we see is that – right along with expectations – the Staples line declined all the way through the market rally, while the Discretionary/Retail line rose the whole time.  That’s exactly what we’d expect to see, which confirms that the market has had a healthy rally.

What we need to watch now is the Trendlines that I’ve drawn for any sign of breaking the “relative strength” trend in both sectors.  A break in the trendline would argue that a reversal or shift in trend was upon us.

In easier language, if the Staples started to outperform the S&P, this would argue for a further decline in the stock market.  If the Discretionary/Staples line broke the rising trendline to the downside, that would equally argue for further declines ahead in the stock market.

It would suggest that money was rotating out of the ‘risky’ stocks/sectors into defensive or calmer (stable) stocks.

We’re at both trendlines as shown, and interestingly enough, we’re at the rising 50 day EMA (at 1,017) in the S&P 500, so any break in the trendlines (and 50 EMA) mentioned here would argue for further price declines and a shift in bias (direction).

We could just as easily get a bounce off all these trendlines, which would of course suggest that higher prices were ahead.

As such, at these inflection points, watch these ratios and the 50 day EMA closely for clues as to what to expect in the week ahead.

Corey Rosenbloom, CMT
Afraid to Trade.com

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2 Comments

2 Responses to “A Look at Relative Strength of Staples and Discretionary Oct 4”

  1. DJ Says:

    amazing and thank you for sharing your research.

  2. DJ Says:

    amazing and thank you for sharing your research.