The US stock market has a history of making brilliant investors look like fools.  Any trader with even a few years of experience can lament on many occurrences that the market destroyed well-researched investment strategies.  The list of casualties is extensive, and some have resorted to illegal means to beat the market only to end up with losses and jail time.

As we write these Market Updates, it is always with the awareness that previous market indicators can change, and the winners in the stock market are typically those with longer hold times versus market timers.  However, longer term past trends is slightly more dependable to clues of market health and direction. One indicator we monitor is the beta of stock activity between consumer discretionary companies versus consumer staple companies. The theory is that when the economy is growing consumers are spending more at discretionary companies (consider non-essential) such as Amazon, Walt Disney, Starbucks, Nike, TJX Max, McDonalds, Priceline, and Netflix.  When the economy is stagnating or weakening then, consumers reduce their discretionary spending enhancing the profits of companies that offer staple household merchandise such as Walmart, Costco, Proctor & Gamble, CVS Health, General Mills, and Colgate-Palmolive.

Two indices to follow that represent these industries is Consumer Discretionary ETF (XLY) and Consumer Staple ETF (XLP).  Below is a chart comparing these two ETF’s from January 1, 2000, to December 31, 2014.  You notice how XLP overtakes XLY at the beginning and throughout a market correction cycle (2000 and 2007). The opposite is also true that XLY provided superior returns as the market recovered (2003 and 2009) and throughout the term of the rally.

What is particularly useful for this analysis is how quickly XLP overtakes XLY in performance at the early stage of the market correction.


Below is a chart comparing XLY to XLP from January 2015 when the Federal Reserved discontinued their $1 Trillion annual stimulus campaign stopping in its tracks the stock market rally that began in 2010.  Notice XLY is more volatile the past 20 months with sharp declines in August 2015 and January 2016 and currently remains behind XLP for the period.


Analysts are always trying to evaluate the health and future performance of the stock market to determine the level of risk investors should be taking.  Based on the past 16 ½ years it would appear that whenever XLP begins to outperform XLY market conditions are deteriorating, and investors should be taking less risk.  However, as mentioned earlier the stock market has amazing abilities to defy for a while strong fundamental and historical evidence and perform in the complete opposite fashion.  This time is another such example as the S&P 500 remains in a positive technical trend recovering strongly from February 11th year’s low.  Illustrated below is the S&P 500 index since January 2015 in a typical bullish technical position above both its 50 days moving average (orange line) and 200 days moving average (red line).



In previous updates, we referenced Warren Buffet’s quote that “fundamentals matter”.  The stock market humbles investors by not performing when and how one would expect. My experience is when conditions are most apparent (either good or bad) that is typically when market activity is least predictable. Currently, there is significant evidence of the stagnant US and world economies with more concerns of further deterioration than recovery.  The US presidential election along with escalating terrorism is not helping to ease investor concerns.  None the less, the US stock market has rallied sharply since February and remains in positive formation despite little evidence of the same level of economic improvement.  Current market activity is rewarding active market traders who ignore fundamentals but unless economic conditions and corporate profits begin to improve the stock market typically corrects to realign values with risk.  In true stock market fashion as in 2000 and 2008, it will probably be to the surprise of many for reasons not well predicted.

Please let us know your thoughts on this update or contact us if you have any questions about your accounts.  We welcome the opportunity to assist you with your pursuit of financial independence!