MACRO MONDAY 28 ~ Discretionary Index Vs Staples Index
Macro Monday 28 – Discretionary Vs Staples
Today we are going to look at the following two very interesting SPDR Indexes and their relationship to one another to help us understand where the U.S. consumer is at present.
SPDR Select Sector Funds (“SPDE SSF”)
1. Consumer Discretionary SPDR Fund
XLY
2. Consumer Staples SPDR Fund
XLP
For reference the SPDR (AKA the Spider) is a short form name for a “Standard & Poor's Depository Receipt”, an exchange-traded fund (ETF) managed by State Street Global Advisors that tracks the Standard & Poor's 500 index
SPX
What are Discretionary Expenses?
Discretionary expenses are defined as “a cost that a business or household can survive without, if necessary”. These are the nonessentials like meals at restaurants, entertainment costs, vacations and 50” flat screen TV’s.
What’s in the SPDR Consumer Discretionary Index?
The SPDR Consumer Discretionary Index seeks to provide focused exposure to companies that provide discretionary nonessential services or produces such as hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; automobile components; distributors; leisure products; and diversified consumer services.
The SPDR Consumer Discretionary Index top 10 holdings are:
1. Amazon 22.62%
2. Tesla 17.76%
3. McDonalds 4.63%
4. Home Depot 4.58%
5. Nike 3.80%
6. Lowes Cos 3.70%
7. Booking 3.62%
8. Starbucks Corp 3.24%
9. TJX Companies 3.22%
10. Chipotle 1.85%
Now we understand exactly what the SPDR Consumer Discretionary Index is and what its main components are. We know that the index itself is driven by stock prices from a collection of companies that offer discretionary services and products in the U.S.
Now lets have a look at the SPDR Consumer Discretionary Chart
Chart 1 – SPDR Consumer Discretionary -XLY
At a glance the chart demonstrates the following:
▫️ In December 2007 price fell below the 200 Week Moving Average (WMA) which coincided with the exact date the Great Financial Crisis commenced (from Dec 2007 – June 2009).
▫️ Interestingly price got back above the 200 WMA in February 2010, 8 months after the recession had ended.
▫️ Since 2009 Consumer Discretionary spending appears to be in a general up trend with a lot of volatility in recent years however still in an uptrend.
▫️ The 200 WMA is still rising and sloping upwards, and price is now back above it which indicates strength.
▫️ Recently we made a potential lower higher and this is something we should look to confirm over the coming months. Should we break higher this would be obviously bullish, another lower high and we know to be cautious.
▫️ In the event we breach the 200 WMA, we should start to get more cautious. This has occurred twice since 2020 and price got back above the 200 WMA however we are very aware that a breach of the 200 WMA can signal a recession as it did so accurately in Dec 2007.
▫️ If we fall below the “INITIAL SUPPORT” marked on the chart, consider this an initial serious warning.
▫️ If we breach the “MUST HOLD SUPPORT” this would be extremely bearish.
- you will see that volatility to the downside on Consumer Discretionary can be quiet something in our comparison charts below. It is worth noting the level of increased volatility since 2018 on the chart. We have not really seen anything like it before dating back to 1998.
Lets move onto the Consumer Staples and see what they are, what they consist of and what the chart is telling us here.
What are Staples?
The term consumer staples refers to a set of essential products used by consumers. This category includes things like foods and beverages, household goods, and hygiene products as well as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.
What’s in the SPDR Consumer Staples Index?
The SPDR Consumer Staples Index seeks to provide a focused exposure to companies that providing consumer staples distribution & retail; household products; food products; beverages; tobacco; and personal care products industries in the U.S.
The SPDR Consumer Staples Index top 10 holding are:
1. Proctor & Gamble 14.11%
2. Costco Wholesale 11.56%
3. Pepsico 9.49%
4. Coca Cola 9.36%
5. Philip Morris Int 4.54%
6. Walmart 4.53%
7. Mondelez Int 4.47%
8. Altria Group 3.40%
9. Colgate Palmolive 3.06%
10. Target 3.00%
We now know exactly what the SPDR Consumer Staples Index is and what its main components are. We know that the index itself is driven by stock prices from a collection of companies that offer Consumer Staple services and products in the U.S. Products/services people cannot do without, products they need day to day.
Now lets have a look at the Chart
Chart 2 – SPDR Consumer Staples IndexXLP
At a glance the chart demonstrates the following:
▫️ The high in Consumer Staples in Dec 2007 coincided with the beginning of the Great Financial Crisis. In Chart 1 above on Consumer Discretionary we seen that a breach of the 200 WMA coincided with Dec 2007 GFC. Both charts demonstrated some synchronicity in advising caution from Dec 2007 forward.
▫️ Nine months later in Sept 2008 a lower high formed in Staples and after that the lower support line was lost following which capitulation occurred. I have marked up a similar “MUST HOLD SUPPORT” line for the current price structure. We have made a lower high similar to 2008. A breach above that lower high would be bullish, continued lower highs would indicate weakness.
▫️ Since 2009 Consumer Staples still appear to be in a general up trend with increased volatility in recent years however still in an uptrend.
▫️ The 200 WMA is still rising and sloping upwards, and price is now back above it now again which indicates strength.
▫️ All the same levels are apparent here as above in Chart 1. The 200 WMA, the “INITIAL SUPPORT” and the “MUST HOLD SUPPORT”.
Now that we are familiar with the charts, their price history, the important levels to watch and some synchronicities, lets have a look at how these charts compare when you line them up together on the same scale.
Chart 3 – Discretionary versus Staples
SUBJECT CHART AT TOP OF ARTICLE
We will take three main things away from this chart:
1. The big obvious finding on the chart is just the extent at which the Consumer Discretionary Index (orange) has risen above Consumer Staples(blue). This wide gap between the orange and blue lines is really stark and it appears it may be starting to close.
2. Historically Consumer Discretionary (orange) revisits and falls lower than Consumer Staples (Blue), particularly during recessions. We have a long way to go for this to happen again. See Chart 1 and Chart 2 above for important support levels to watch (for both).
3. Consumer Discretionary (Orange) started to make a series of lower highs prior to the Great Financial Crisis (see black arrow on chart), something similar may be occurring now. We are also already aware that Consumer Discretionary fell below the 200 WMA in exactly December 2007 which was the first month of the Great Financial Crisis. This is also the exact date when Consumer Staples topped in 2007. At present Consumer Staples made a top in April 2022 and Consumer Discretionary made a potential lower high in Dec 2023, however it has not fallen below and remained below the 200 WMA (making this a key line in the sand to watch going forward).
Chart 4 – The Relative Strength of Consumer Discretionary
In this chart I just wanted to illustrate the relative strength of the Consumer Discretionary over the Consumer Staples over the longer term. You can create this chart by inserting XLY/XLP into TradingView.
As you can see this chart has been trending up and to the right since 2008. Discretionary spending appears to be on a long term uptrend and this is worth noting as a long term potential shift towards spending on services, experiences and higher end electronics. Technology Index’s in prior Macro Mondays are showing strength and we have to consider that if we do not breach the important support levels marked in Chart 1 and Chart 2 above, we may have a secular shift in spending habits towards discretionary (until support levels are broken). Granted this may be the least probable and least accepted view given recession fears, liquidity concerns and the yield curve un-inversion likely to occur in 2024. We do however need to keep an open mind, a COVID-19 type event might bring us down to the bottom trend line only to bounce off it after another stimulus hits the market. If we lost that lower support line, we can say unequivocally that the secular trend of discretionary spending strength is over.
We now have a two more Indexes to watch that give us a good idea of the impact consumer spending is having on companies in the marketplace. We have our levels to watch and a good understanding of the risks and potential trends. Use it wisely.
All my charts are on TradingView and you can revisit them at any time and press play to see have we breached any important levels to the upside or downside.
Thanks for reading.
PUKA
Today we are going to look at the following two very interesting SPDR Indexes and their relationship to one another to help us understand where the U.S. consumer is at present.
SPDR Select Sector Funds (“SPDE SSF”)
1. Consumer Discretionary SPDR Fund
XLY2. Consumer Staples SPDR Fund
XLPFor reference the SPDR (AKA the Spider) is a short form name for a “Standard & Poor's Depository Receipt”, an exchange-traded fund (ETF) managed by State Street Global Advisors that tracks the Standard & Poor's 500 index
SPXWhat are Discretionary Expenses?
Discretionary expenses are defined as “a cost that a business or household can survive without, if necessary”. These are the nonessentials like meals at restaurants, entertainment costs, vacations and 50” flat screen TV’s.
What’s in the SPDR Consumer Discretionary Index?
The SPDR Consumer Discretionary Index seeks to provide focused exposure to companies that provide discretionary nonessential services or produces such as hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; automobile components; distributors; leisure products; and diversified consumer services.
The SPDR Consumer Discretionary Index top 10 holdings are:
1. Amazon 22.62%
2. Tesla 17.76%
3. McDonalds 4.63%
4. Home Depot 4.58%
5. Nike 3.80%
6. Lowes Cos 3.70%
7. Booking 3.62%
8. Starbucks Corp 3.24%
9. TJX Companies 3.22%
10. Chipotle 1.85%
Now we understand exactly what the SPDR Consumer Discretionary Index is and what its main components are. We know that the index itself is driven by stock prices from a collection of companies that offer discretionary services and products in the U.S.
Now lets have a look at the SPDR Consumer Discretionary Chart
Chart 1 – SPDR Consumer Discretionary -
XLYAt a glance the chart demonstrates the following:
▫️ In December 2007 price fell below the 200 Week Moving Average (WMA) which coincided with the exact date the Great Financial Crisis commenced (from Dec 2007 – June 2009).
▫️ Interestingly price got back above the 200 WMA in February 2010, 8 months after the recession had ended.
▫️ Since 2009 Consumer Discretionary spending appears to be in a general up trend with a lot of volatility in recent years however still in an uptrend.
▫️ The 200 WMA is still rising and sloping upwards, and price is now back above it which indicates strength.
▫️ Recently we made a potential lower higher and this is something we should look to confirm over the coming months. Should we break higher this would be obviously bullish, another lower high and we know to be cautious.
▫️ In the event we breach the 200 WMA, we should start to get more cautious. This has occurred twice since 2020 and price got back above the 200 WMA however we are very aware that a breach of the 200 WMA can signal a recession as it did so accurately in Dec 2007.
▫️ If we fall below the “INITIAL SUPPORT” marked on the chart, consider this an initial serious warning.
▫️ If we breach the “MUST HOLD SUPPORT” this would be extremely bearish.
- you will see that volatility to the downside on Consumer Discretionary can be quiet something in our comparison charts below. It is worth noting the level of increased volatility since 2018 on the chart. We have not really seen anything like it before dating back to 1998.
Lets move onto the Consumer Staples and see what they are, what they consist of and what the chart is telling us here.
What are Staples?
The term consumer staples refers to a set of essential products used by consumers. This category includes things like foods and beverages, household goods, and hygiene products as well as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.
What’s in the SPDR Consumer Staples Index?
The SPDR Consumer Staples Index seeks to provide a focused exposure to companies that providing consumer staples distribution & retail; household products; food products; beverages; tobacco; and personal care products industries in the U.S.
The SPDR Consumer Staples Index top 10 holding are:
1. Proctor & Gamble 14.11%
2. Costco Wholesale 11.56%
3. Pepsico 9.49%
4. Coca Cola 9.36%
5. Philip Morris Int 4.54%
6. Walmart 4.53%
7. Mondelez Int 4.47%
8. Altria Group 3.40%
9. Colgate Palmolive 3.06%
10. Target 3.00%
We now know exactly what the SPDR Consumer Staples Index is and what its main components are. We know that the index itself is driven by stock prices from a collection of companies that offer Consumer Staple services and products in the U.S. Products/services people cannot do without, products they need day to day.
Now lets have a look at the Chart
Chart 2 – SPDR Consumer Staples Index
XLPAt a glance the chart demonstrates the following:
▫️ The high in Consumer Staples in Dec 2007 coincided with the beginning of the Great Financial Crisis. In Chart 1 above on Consumer Discretionary we seen that a breach of the 200 WMA coincided with Dec 2007 GFC. Both charts demonstrated some synchronicity in advising caution from Dec 2007 forward.
▫️ Nine months later in Sept 2008 a lower high formed in Staples and after that the lower support line was lost following which capitulation occurred. I have marked up a similar “MUST HOLD SUPPORT” line for the current price structure. We have made a lower high similar to 2008. A breach above that lower high would be bullish, continued lower highs would indicate weakness.
▫️ Since 2009 Consumer Staples still appear to be in a general up trend with increased volatility in recent years however still in an uptrend.
▫️ The 200 WMA is still rising and sloping upwards, and price is now back above it now again which indicates strength.
▫️ All the same levels are apparent here as above in Chart 1. The 200 WMA, the “INITIAL SUPPORT” and the “MUST HOLD SUPPORT”.
Now that we are familiar with the charts, their price history, the important levels to watch and some synchronicities, lets have a look at how these charts compare when you line them up together on the same scale.
Chart 3 – Discretionary versus Staples
SUBJECT CHART AT TOP OF ARTICLE
We will take three main things away from this chart:
1. The big obvious finding on the chart is just the extent at which the Consumer Discretionary Index (orange) has risen above Consumer Staples(blue). This wide gap between the orange and blue lines is really stark and it appears it may be starting to close.
2. Historically Consumer Discretionary (orange) revisits and falls lower than Consumer Staples (Blue), particularly during recessions. We have a long way to go for this to happen again. See Chart 1 and Chart 2 above for important support levels to watch (for both).
3. Consumer Discretionary (Orange) started to make a series of lower highs prior to the Great Financial Crisis (see black arrow on chart), something similar may be occurring now. We are also already aware that Consumer Discretionary fell below the 200 WMA in exactly December 2007 which was the first month of the Great Financial Crisis. This is also the exact date when Consumer Staples topped in 2007. At present Consumer Staples made a top in April 2022 and Consumer Discretionary made a potential lower high in Dec 2023, however it has not fallen below and remained below the 200 WMA (making this a key line in the sand to watch going forward).
Chart 4 – The Relative Strength of Consumer Discretionary
In this chart I just wanted to illustrate the relative strength of the Consumer Discretionary over the Consumer Staples over the longer term. You can create this chart by inserting XLY/XLP into TradingView.
As you can see this chart has been trending up and to the right since 2008. Discretionary spending appears to be on a long term uptrend and this is worth noting as a long term potential shift towards spending on services, experiences and higher end electronics. Technology Index’s in prior Macro Mondays are showing strength and we have to consider that if we do not breach the important support levels marked in Chart 1 and Chart 2 above, we may have a secular shift in spending habits towards discretionary (until support levels are broken). Granted this may be the least probable and least accepted view given recession fears, liquidity concerns and the yield curve un-inversion likely to occur in 2024. We do however need to keep an open mind, a COVID-19 type event might bring us down to the bottom trend line only to bounce off it after another stimulus hits the market. If we lost that lower support line, we can say unequivocally that the secular trend of discretionary spending strength is over.
We now have a two more Indexes to watch that give us a good idea of the impact consumer spending is having on companies in the marketplace. We have our levels to watch and a good understanding of the risks and potential trends. Use it wisely.
All my charts are on TradingView and you can revisit them at any time and press play to see have we breached any important levels to the upside or downside.
Thanks for reading.
PUKA
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