Big Printin’ – XLY: Consumer Discretionary

by riskreversal October 17, 2016 3:24 pm • Big Printin'

Earlier we highlighted the weakness of a handful of consumer discretionary stocks in the Dow Jones Industrial Average (here):

Some of the worst performing stocks in 2016 in the Dow Jones Industrial Average are not industrials, they are in fact consumer discretionary.  On Friday we highlighted the poor 2016 performance in MCD, today making a new low on the year down almost 5%, and down about 15% from its all time highs made in May (Making A Meal Out Of It).  There is obviously the long national nightmare that has been Disney’s (DIS) 25% decline from its August 2015 all time highs and its 13.7% ytd declines.  Nike down a whopping 18% on the year and down 27% from its all time highs made in late December.

The last one though it is a bit unexpected, The Home Depot (HD), a stock like the others that until recently has been Teflon in almost every market environment in the last 5 years.  HD is down 5.25% on the year, and down 10% from its all time highs made in early August, vs the Dow up 3.7% on the year and only down about 3% from its all time highs made this summer.

Regular readers know that we don’t spend to much time contemplating the performance of the Dow, merely thought that the poor performance in the group of 30 is interesting. What’s more interesting though is the diversity within the consumer discretionary sector, as measured by the S&P Select etf (XLY).  While many of the stocks listed earlier make up a large part of the weight, (AMZN) is the largest component at 14%, while Comcast (CMCSA), The Home Depot (HD), Disney (DIS) and McDonalds (MCD) round out the top 5, with equaling nearly 25% in total.  AMZN and CMCSA are crushing it so far in 2016 up 22% and 15.5% respectively, while the other 3 are all down.

The XLY is now down about 5% from its 52 week and all time highs made in August and now sitting on important near term technical support at $78, that also corresponds with the etf’s 200 day moving average:

XLY 1yr chart from Bloomberg
XLY 1yr chart from Bloomberg

There was a large bearish roll in the XLY shortly after the opening when the etf was trading $78.85. A trader sold to close 15,000 Jan 65 puts at 30 cents and bought to open 20,000 March 75 / 60 put spreads for $1.82, or $3.64 million in premium. This put spread breaks-even at $73.18, down 7%, offering profit potential to up to $13.18, or $26.36 million if the etf is at $60, down 24% from the trading level.

Regular readers know that we don’t extrapolate too much from unusual options activity as it is nearly impossible to know what a trade is against, or what the trader’s intent may be (hedge, stop, leverage etc).

If I were targeting an outright bearish bet in the XLY I might tighten up the strikes and target the February low near $68 and reduce the premium at risk, or look to finance the Mar 75 puts by selling a shorter dated put of a strike below $75.  But a quick gander at the 5 year chart and you see the air-pocket below the 2016 lows down to the low $60s:

XLY 5yr chart from Bloomberg
XLY 5yr chart from Bloomberg