Consumer Discretionary Sector Overheated

Be aware of a downturn ahead in consumer discretionary stocks

   

The massive run higher off the 2009 lows in stocks has been well documented, and according to the latest investor surveys, is shaping more bears into bulls on a daily basis.  One sector with a particularly nutty stretch (i.e. steep rally) since then is the consumer discretionary stocks here-forward represented by the SPDR Consumer Discretionary Sector Fund (XLY).

The multi-year chart of the SPDR Consumer Discretionary Sector Fund shows that it has traded within the confines of an up-trending channel for the most part.  Thus every time the upper end of the channel was reached (or slightly exceeded), the stock either consolidated sideways or moved lower in a mean reversion move.  The latest rally however that started in November 2012 broke well above the upper end of the trading channel before correcting but only down to the breakout point.  Furthermore, the May – June correction only served as a spring board for the sector’s next vertical leap which now leaves it dangling in thin air and at its furthest distance out of the channel since its formation in 2009.

To wit, and just because folks still have it in recent memory, the below chart doesn’t look unlike the one of Apple  (AAPL) in terms of its slope before it topped out last year.

xly multi year Consumer Discretionary Sector Overheated

On the daily chart below, the SPDR Consumer Discretionary Sector Fund  perfected its breakout past resistance (red dotted line) on June 5, which served as the thus far mid-point of the rally off the June lows.xly daily Consumer Discretionary Sector Overheated

In short, the 9.60% rally off the June lows leaves the SPDR Consumer Discretionary Sector Fund  with a too steep to sustain slope on the daily chart below and far extended beyond the multi-year trading channel above.

It thus feels to yours truly that it is only a matter of time for the XLY to correct at least to the June 5 breakout point around $57.30 and eventually with a truer mean-reversion move closer to the low to mid $50s.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.


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