Macro Wrap – $XLP vs. $XLY Signals Weakness Ahead

by Enis February 22, 2013 7:52 am • Commentary

Great post last night from the team at Global Macro Monitor.  In it, they discuss the ratio of consumer staples (XLP) to consumer discretionary (XLY), and its potential importance for the future direction of the broader market.  In their own words:

The consumer staples ETF (XLP) began to outperform the consumer discretionary ETF (XLY) on January 25th while the S&P500 continued to move higher.   As the ratio (red time series) moves lower it generally reflects growing caution among investors, who moving into defensive plays, and has been a fairly good early warning indicator of risk aversion.

Here are the 2 charts they posted to illustrate:

Feb21_Consumer Discretionary_Staples_SPYFeb21_Consumer Discretionary_Staples_SPY_2(click here if chart is not observable)


The first chart shows the recent divergence between the SPX moving higher, and the ratio moving lower (mainly as market players pile into XLP, which made a new all time high yesterday).  The second chart shows the ratio over the last 15 years, with the circles illustrating that the ratio peaked before the market peaked in 2007, and bottomed before the market bottomed in 2009.

These sorts of relationships are not perfect predictors by any means.  Only when looking backward does the signal seem so obvious.  BUT, I would point out that the health care ETF, XLV, is also essentially at all-time highs, while most cyclical sector ETFs are below their highs from 2007.  In that sense, the current rally in the SPX, to just 45 points shy of the all-time high, has been driven by defensive sectors, and does not indicate nearly the same appetite for risk as in 2007.  Under the hood, this market is not as confident as the broader indices seem to signal.

Markets overnight:

  • Asian price action was relatively tepid, as China was lower again, though only 0.5%, and other markets were mixed.  
  • Europe opened green, and has been rallying most of the session, after making 2.5 month lows on Thursday.
  • SPX futures up 0.6%, and the dollar generally weaker, though flat vs. the Euro.  Treasuries down small, and commodities generally higher.
  • HPQ, AIG, and ANF trading up 4% after strong earnings, though JWN lower.