XLP:XLY Consumer Staples:Consumer Discretionary Ratio Weekly Chart

It's time for fractions. Remember those ratios from math class years ago? The numerator is the number at the top of the fraction and the denominator is the number at the bottom of the fraction so 1/2 (one-half) is a 1 in the numerator and a 2 in the denominator. When the numerator, or top number moves higher, the overall fraction, or ratio, moves higher. But when the denominator, the bottom number in the fraction, moves higher, it drags the XLP:XLY ratio lower.

The XLP:XLY weekly chart is a long-term gauge of consumer spending and in essence, consumer attitude and even consumer sentiment. The XLP ETF is consumer staples. This is your toothpaste, paper towels, toilet paper, hygiene products, soap, detergent, all those items that you need for daily life. Think tickers like PG, CLX, WMT, MO, PM, MDLZ, COST, COKE, PEP, etc.. Clorox and other staples are a moon shot this year due to the covid pandemic.

The XLY ETF is consumer discretionary. This is the fun stuff especially when you're making big bucks, living large, talking large, tipping large and buying honey a large diamond for that lovely trophy finger. Discretionary items are the treats in life. Think companies like AMZN where you buy these instant gratification goodies. And of course Apple the products the discretionary crowd desires along with fancy cars, furs, jewelry and other trinkets and bobbles. Another is SBUX where the bigshots throw big money down on a cup of coffee they could have made at home for one-fifth the cost. They should call Starbucks 'Tenbucks' since every time you walk in there they take at least ten bucks out of your wallet. NKE and MCD are two other discretionary stocks when you freely spend on expensive tennis shoes and dine out more times per week when the perception is that times are good, the future is so bright and only gettin' better, as Timbuk 3 would opine. 

Using the 100-week MA as a deciding line, XLP started rocketing higher after October 2007 as XLY dropped which shot the XLP/XLY ratio to the moon. That was the stock market crashing. People ran to staples as they saw their money lost in the stock market and their jobs vaporize into thin air. When that happens you are more worried about stockpiling toilet paper and soap instead of buying an Apple watch that will end up in the kitchen junk drawer.

Then former Federal Reserve Chairman Bernanke stepped in to save the stock market and protect the wealthy class that was losing too much money. Bernanke began printing money like a madman and dropping it from helicopters to save the day, and he did. That was the start of quantitative easing, QE1, in March 2009. The chart tells you what happened next. 11 years of partying, that is what happened. Everyone has a brand new car in the driveway of the McMansion. Honey has a bunch of diamond rings and bracelets. Junior has a room decked out with all the latest gaming and technical gadgetry. Mr Honey has a speed boat and twin skidoo's on trailers sitting on the concrete driveway; they plan to use them some day; maybe when they get back from Paris and Venice.

In 2009, the XLP:XLY fraction drops through the 100-week MA signaling happy times ahead for stocks. In 2011, you see people stated to become worried and began buying more staples instead of fun stuff which led to a pullback in stocks, but the Fed was quick to say they will provide "infinite" stimulus and liquidity so the party was back in full swing. In 2014, consumers again became worried as the stock market goes up and up and up. This led to the 2015 pullback in equities, what Keystone calls 'the last legitimate top in the stock market', but again, the Fed and other central banks are always ready to pump. During 2015, reactions were mixed so the ratio chops sideways and then when the consumers started to further prefer staples over discretionary products the Fed stepped in and created the early 2016 Tweezer Bottom and stocks rally to the present day's highs.

During 2018 and 2019 consumers again started to favor staples worrying about the future and the XLP:XLY pops above the 100-week MA signaling trouble which occurs at the start of this year with the big selloff. The ratio jumps higher as consumers run to stores to buy hand sanitizer, masks and paper towels and Junior is told he will not receive any Apple products for the foreseeable future. But, again, the Fed is always there to save the day and protect the wealthy privileged class, that own the stock market. Not only the obscene monetary stimulus (Fed) but Congress unleashes huge piles of fiscal stimulus on the public (which creates the happy economic data that now fades again). A double-whammy of bullish glory. Okay, that is where we are at; now what?

The ratio is at record lows and desperately needs to mean revert higher. The lower low in price is met with universal positive divergence across all indicators (green lines). The ratio is fueled-up with bull juice and ready to rocket higher. But wait. What happens if the XLP:XLY ratio jumps higher, like 2008-2009, and the possie d right now says that is on the come?

It makes sense that staples will outperform discretionary going forward since the coronavirus pandemic is worse than people realize. And how many fur coats, diamond rings and vacation homes does honey need? The US hospital system may collapse as the new year begins but most Americans are whistling past the graveyard, without a care or worry, as they stare facedown at their smartphones. "What?! Me worry?" That's what the famous economist Alfred E Neuman would say. All joking aside, prepare yourself for the sh*tstorm coming. As far as the individual ETF's go, both will fall but XLY will fall more than XLP hence, staples will outperform discretionary ahead. You can short XLY right now going forward. 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.