XRT - XLY: Here Comes The Consumer From Behind - But Not For Long

2023-07-11 19:08:42 ET

Summary

• Surprise surprise - we went from AI love to consumer love in the span of a month and a half.
• Despite my concerns that we are nearing a tail event for equities, the movement in consumer discretionary stocks as held by Consumer Discretionary Select Sector SPDR® Fund ETF is arguably justified from an intermarket analysis perspective.
• Is this bullish? Yes - as noted in The Lead-Lag Report when all signals flipped risk-on entering June.

A consumer is a shopper who is sore about something. - Harold Coffin.

Surprise surprise - we went from AI love to consumer love in the span of a month and a half. The Consumer Discretionary Select Sector SPDR® Fund ETF (XLY) is an exchange-traded fund ("ETF") which provides investors with exposure to the consumer discretionary sector. This sector includes companies that produce goods and services considered non-essential yet desirable by consumers when they have sufficient disposable income.

Take a look at the Consumer Discretionary ETF relative to the SPDR® S&P 500 ETF Trust ( SPY ). Relative strength is undeniable, and to some extent is justified as recession fears abate, but I'm a bit skeptical on how long strength can last.

Justified Momentum

Despite my concerns that we are nearing a credit event for equities, the movement is consumer discretionary stocks is arguably justified from an intermarket analysis perspective. Consider that the sector vastly underperformed last year as recession concerns grew, and that the May short-term bottom in Lumber prices marks perhaps some near-term relief that housing may not be in as much trouble as I myself belief it is in the long term.

Credit Card Debt and Interest Rates

Is this bullish? Yes - as noted in The Lead-Lag Report when all signals flipped risk-on entering June - we are in a risk-on environment. But fundamentals in the long term do matter. Betting against the consumer has arguably never been a good trade, but consider that credit card debt held by Americans currently totals nearly $988 billion - a record high. Consumers have increasingly turned to credit to manage their budgets. This has led to record or near-record high balances. On average, Americans carry around $5,733 in credit card debt.

High credit card debt and soaring interest rates could potentially impact consumer spending, which in turn, could impact the performance of the consumer discretionary sector. Again - I agree relative momentum is there now, but at some point these high rates could become a very real problem for consumers.

Bottom Line: A Tradeable Rally But Nothing More

For those tactically trading, momentum does look like it's shifting from the NASDAQ (COMP.IND) to consumer stocks, and I'd argue it should give just how badly consumer stocks have performed. If you look at Retailers ( XRT ), the ratio against the S&P 500 peaked way back in 2021.

These stocks were due for a much-needed oversold bounce and period of investor repricing. But make no mistake about underlying fundamentals. The consumer is likely to at some point realize that minimum payments are rising, credit card interest rates are downward sticky, and good times don't last. If you're active, other ETFs within this sector have also been moving nicely playing on the consumer include:

• Vanguard Consumer Discretionary ETF ( VCR )
• First Trust Consumer Discretionary AlphaDEX Fund ( FXD )
• Fidelity MSCI Consumer Discretionary Index ETF ( FDIS )
• Invesco Dynamic Leisure & Entertainment ETF ( PEJ ).

Worth a trade? Likely. Worth an investment? Unlikely.

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