Rules of the Game: Consumer Highs

 | Jun 06, 2013 | 12:00 PM EDT
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We love to buy stuff.  The year-to-date performance of the S&P consumer discretionary sector is testament to that.

So far in 2013, the sector is up 18.11%, lagging only health care and financials. Throughout the moribund economy of the past few years, consumer stocks have been strong, although various stocks have cycled in and out of leadership. As of this week, price performers include Walgreen (WAG), Home Depot (HD), Lowe's (LOW), CVS Caremark (CVS, ), Nike (NKE) and Starbucks (SBUX).

Among the cellar dwellers, in terms of recent price action, are Yum Brands (YUM), Wal-Mart (WMT) and McDonald's (MCD).It's not always easy to discern any trends in the tea leaves, but there is some indication there that mid- and down-market companies are lagging, while the higher end (and housing related names) are basking.

 Tiffany (TIF) is up 36% year-to-date. Meanwhile, Porsche, which is traded in Germany, got a boost this week after saying sales revved up 38% in May. Tesla Motors (TSLA) has nearly quadrupled in value since December.

 OK, Tesla is still enjoying the glow of youth. It's not uncommon for newly public companies to make big leaps, but you see my point: Companies catering to the high-end consumer are in favor. Pent-up demand? Grotesque income inequality? Who knows? Frankly, my readers, I don't give a damn. I know plenty of ink and airtime has been devoted to dissecting the whys and wherefores behind the current sector leaders. It's one of my pet peeves, however,  when short-term traders try to predict trends, when the effects are already priced in. 

For example, there will be plenty of angst about the upcoming jobs report, and how it affects the consumer discretionary sector. But it's instructive to see how a consumer discretionary ETF is performing. That's an excellent gauge of the sector's current health.

The SPDR Consumer Discretionary ETF (XLY) has dipped 1.6% this month. The S&P is down slightly less, 1.3% in June. As everybody with a pulse knows (well, everybody who reads RealMoney, anyway), the S&P rallied to an all-time high last month. The consumer discretionary sector kept pace with that rise.

There's a bit of tracking error between the actual index and the ETF, but it's fairly close when it comes to the top holdings. Home Depot, Disney (DIS), Comcast (CMCSA), McDonald's and Amazon (AMZN) are all heavily weighted.

There's no question that the consumer discretionary sector ETF is a cyclical vehicle, and consumer sentiment (or, to be more accurate, actual wallet-opening) has an effect. Trader sentiment about how consumers are likely to behave also has an effect, as do wider market moves.

Despite the doom and gloom, and fear that higher taxes, under-water houses and high unemployment will send consumers fleeing from the mall, it hasn't happened. For those who trade individual stocks, keep an eye on the rotation into higher-end companies and away from the bargain bin. Also keep in mind that pullbacks in stocks and ETFs can amount to a buying opportunity for investors who are sticking to their plan. 

Columnist Conversations

volatility is quite low here, and we could see some downsides here in the short term. ...
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this chart is showing great bullish signs here, we like this to take out the old high shortly. ...



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