Monday, December 23, 2013

XLY:XLP Consumer Discretionary Consumer Staples Ratio Long-Term Weekly Chart Overbot Rising Wedge Negative Divergence

A great longer-term cyclical and secular signal for markets is the XLY:XLP ratio. Or, if you prefer, XLP:XLY ratio which would be the inverse of the chart above. XLY is consumer discretionary (think Gucci hand bags, fancy cars, fur coats, diamonds, art, vineyards, designer clothes, etc...) and XLP consumer staples (toilet paper, toothpaste, cereal, soap, laundry detergent, etc..). The green circles show the wine flowing like water with consumers in a happy joyous mood spending money like drunken sailors and not the least bit concerned or worried about rough economic times ahead. The red circles show the hunker-down philosophy where consumers return the diamonds and furs and instead by soap and toilet paper as they worry about what the future holds in a tumbling stock market and/or global war, pandemic and terrorism.

Life has been good for the last 5 years since the Fed and other central bankers have supported and pumped the markets higher each step of the way. The red rising wedge is finishing up as 2014 begins and the drops from falling wedges can be quite dramatic. The red and green dots show the stock market tops and bottoms, respectively, due to the price too far extended above or below the 89 MA. The dot-com bubble popped in early 2000, stocks bottomed late 2002 and then placed the bottom as the Iraq War started in March 2003. Everyone was living large with very low unemployment from 2003 into the October 2007 market top. Think back to those years; everyone was a big-shot driving around in new cars and taking fancy trips and so forth. The party ended as the Fall 2008 crash occurred. Folks were hunkered in a bunker in early 2009 but the Fed saved the day with QE 1 to pump the stock market.

Price crossed down through the 89 MA about 3 or 4 months ahead of the actual October 2007 top and price crossed up through the 89 MA about 3 to 6 months after the March 2009 bottom. Thus, the top was left-translated and the bottom was right-translated. Since price remains extended above the 89 MA, with universal negative divergence across all indicators, the expectation is for the ratio to move lower moving forward. The money flow drops for a couple years showing the funds slowly distributing the high-flying stocks and placing that money into staples as time goes by. The main reason the ratio has not rolled over already is the robust spending by Chinese and also Russian millionaires and billionaires. The governments may confiscate their dough at any time so smartly, these wealthy folks are buying anything they can get their hands on; art, high-priced real estate, vineyards, diamonds, etc.. They figure even if they overpay it is better than the government confiscating all your money. This behavior pumps the XLY higher to keep the ratio elevated.

The expectation is for the XLY:XLP to receive a spank down due to the neggie d and then move sideways to sideways lower for the weeks and months ahead, and for price to drop under the 89 MA within the next 3 or 4 months. Certainly, no one currently expects or is looking for this to occur. In 2014 and 2015, consumers will once again huddle in their basements hording soap and toilet paper only caring about daily needs. Sadly, the times where staples are preferred over discretionary coincide with recessions and depressions and/or major and dramatic negative global market events. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

Note Added 11:23 AM:  Equities pop today with the XLY up +0.3% and XLP down -0.2%, thus, the upward trend continues and the XLY:XLP ratio is at 1.55. Traders smack SWY -1%, who needs food? Traders smack K -0.9%, who needs cereal? Traders smack WFM -1.7%, who needs food let alone healthier food? PG is -0.7% so folks do not need soap or toilet paper either and instead buy booze; the wine is flowing like water. Instead of buying safe stuff traders are buying 4K Armani suits and driving brand new BMW's off the lot. Party on. (SWY, K, WFM and PG are all consumer staples stocks). This push higher today may very well be the near-term top for the XLY:XLP ratio as discussed above.

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