Consumer Discretionary Spending Sector Analysis

Feb 13, 2008: 2:08 PM CST

The Consumer Discretionary Sector is important to study for the broader implications for the economy and stock market. When the consumers spend, it is generally good for the economy and when they don’t (or hold back purchases), it’s not. Let’s look at the chart for the XLY, Consumer Discretionary Sector SPDR ETF (weekly):

Notice the lengthy negative momentum divergence that occurred through most of 2007. It resolved strongly to the downside, forming both a new momentum low and a classic bear flag which actually far exceeded the ‘measured move’ or price objective inherent in the pattern.

2008 saw price make both a new price low and a new momentum low, indicating higher odds that a new price low is yet to come. Notice the current rally which was met by the falling 20 period moving average as resistance.

The rally was sharp and explosive, and sent interesting and murky signals to the sector rotation model, but it appears that this was simply a strong counter-trend move or a massive short-squeeze rally.

The daily chart shows more of the wave-like pattern I have been describing previously.

Notice how you can almost “feel” the price swings, as supply overtakes demand and vice-versa. I think it’s easiest to study the structure just from the waves themselves, and not complex indicators.

Notice how the price undulates toward and away from its key moving averages in a trend, and how they serve as both support and resistance as price moves from one price level to the next in the trend.

Notice also the massive reversal in late January and the fact that price is now trapped between the 20 and 50 moving average. An upward break would be a wonderful sign for the bulls, but should price break downward, it would be more of the same as th e bears would take over again and price would retest the $28 level or perhaps make new lows.

This sector and the Financials sector are tied closely together, in that they both benefit from reduced interest rates (cost of carry, or credit card interest rates, or the like). Consumers are more likely to spend if they have lower credit card rates than higher (though it’s not as simple as that of course).

Keep an eye on this critical sector, and if it shows signs of a bottom, then that would be wonderful news for the overall market itself.

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  1. Stock Market » Consumer Discretionary Spending Sector Analysis Says:

    […] Corey Rosenbloom wrote an interesting post today on Consumer Discretionary Spending Sector AnalysisHere’s a quick excerptThe Consumer Discretionary Sector is important to study for the broader implications for the economy and stock market. When the consumers spend, it is generally good for the economy and when they don’t (or hold back purchases), … […]