Support for consumer discretionary stocks

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Consumer discretionary stocks have come under fire this year. The sector is among the most “growing” in the market. Firms in the commodities sector have also performed relatively well in a highly risky trading environment in recent months as well. But could there be a silver lining for discretionary bulls? We spotted two relative charts that make the bullish case, if only for a short-lived relief rally.

Cautious on risky assets, but short-term relief is possible

To be clear, we walk with caution on stocks at present. In fact, we favor bonds over medium-term equities. From a risk management perspective, however, it may be worth considering where we might be going wrong. If we see support come into play for risky sectors, such as discretionary sectors, then that could help trigger at least a relief rally in equities.

A domestic risk perspective

The first chart shows US consumer discretionary stocks versus US consumer staples companies. The ratio chart shows a meteoric high at the start of 2022, as high-flying growth names saw a final buying spurt while security plays were shelved. The narrative shifted rapidly over the following months.

Discretionaries have reached bear market territory after their peak in early 2022, and only 8% of members of the sector are trading above their 200DMA – the lowest since April 2020. Compared to Staples, which is in the black since last November, consumer discretionary has been down more than 25%. So where’s the silver lining here? Well, if we go back to 2018, we see that the ratios chart peaked at almost 1.7x back then. This is precisely the level today. Could the former resistance be the current support? It’s something to watch as the feeling has become distinctly one-sided.

US Consumer Discretionary vs. Consumer Staples: Near Support?

US Consumer Discretionary vs. Consumer Staples

Top-down charts, Refinitiv data streams

A downward trend continues in the world

The next step is a global perspective. Consumer discretionary peaked in the second quarter of 2021. The pullback is around 20% so far. Like the first chart, relative price action has fallen to former support. Relative to the All Country World Index (ACWI), discretionaries ranged from 0.40x to 0.43x between 2015 and mid-2019. Here we go again. Will the principle of polarity – the notion that old support comes back as new resistance – come to light? At the very least, there is a large amount of congestion at these relative levels that could attract some buyers.

Global Discretionary vs. Global Equities: A Return to the 2015-2019 Range

chart of global consumer discretionary relative performance

Top-down charts, Refinitiv data streams

Conclusion

These two tables of technical ratios are only a means of analyzing global equities at present. Risk appetite has fallen precipitously – no doubt over the past year. The relative chart of Consumer Discretionary versus Consumer Staples is a common way to gauge the health of the market. For now, a clear downtrend is in place over the past few months (US) and past year (World). A little silver lining for bulls is that both charts have moved back to former resistance which could be technically significant.

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