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Chart Advisor: Wants Over Needs


Visit: Investopedia

Thursday, February 18, 2021

1/ Discretionary sector leads staples in a bullish outlook 

2/ Retail rebound 

3/ Are Walmart’s woes symptomatic?

4/ The bottom line

1/ Discretionary Sector Leads Staples in a Bullish Outlook 

Major market indexes drifted lower for the second consecutive day, but deeper trends persist. Discretionary sector stocks (consumer wants) are outpacing staples stocks (consumer needs) despite recent fluctuations. As long as this bullish indication persists it implies that market volatility will likely continue to decrease, and stocks will head steadily, if slowly, higher over the coming days and weeks.   

Chart watchers can better see this dynamic using a tool such as the chart below. It is a comparison of two relative strength studies. The first compares the relative strength between State Street’s Consumer Discretionary Sector Index ETF (XLY) and its S&P 500 Index ETF (SPY). The XLY/SPY comparison (shown as the purple line) displays the relative difference between the two ETFs. If the line is rising, then XLY is performing better than SPY on that day.  

The next comparison in the chart looks at a similar study of the relative strength between State Street’s Consumer Staples Sector Index (XLP) and SPY. The XLP/SPY comparison (red line) trends higher when staples stocks outperform the S&P in general. This is a bit of a contrarian indicator, because as it goes lower, the market goes higher. 

The blue line in the chart is the Cboe Volatility Index (VIX). Despite its mild rise today, this indicator should likely trend lower as consumers find increasing confidence in holding shares at current prices.     

2/ Retail Rebound 

If the Consumer Discretionary Sector stocks are leading others, shouldn’t it translate into improved share prices for retail companies? Indeed it has. The chart below shows that since the fourth quarter of 2020, investors have begun to believe in the inevitability of the return of retail stocks. 

The chart displays four stocks including State Street’s Retail Sector ETF (XRT), Nordstrom’s (JWN), Simon Property Group (SPG) and even Sears Holdings (SHLDQ) for good measure. All these stocks are tied to mall-based stores, and all of them show a very strong upward trend. It seems difficult to expect the trend to continue at this pace, especially considering the market’s reaction to Walmart’s (WMT) earnings miss this morning.   

3/ Are Walmart’s Woes Symptomatic?


The six percent drop of WMT’s share price at today’s open may not have seemed surprising at first glance. After all the company did miss estimates. But a closer look reveals that there was actually a lot of good news. Revenues were up by 7% year over year—saying a lot for 2020. Same-store sales were even better at an 8% increase. Online sales were a whopping 70% better. The company is making a massive commitment to infrastructure spending (pretty smart considering the low interest rates available now) and simultaneously increasing dividend size and employee wages.  

For investors who are wondering whether share-price decline is a communicable condition this season, they likely needn’t worry. Notice in the chart below that Target (TGT) did not fall in sympathy. That would be the case if Walmart’s report implied bad things for the industry, but since it didn’t happen, it is possible that buyers of WMT may soon establish a support price. 

4/ The Bottom Line 

Stocks dropped at the open but gained ground through the session just like yesterday. Since consumers are not done with spending or investing, discretionary stocks continue to lead—this is a bullish indicator.  

Originally Published on February 18, 2021

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