Is it Time to Take a Stab at Discretionary Stocks?

The great sector rotation out of high flying momentum stocks and into safe haven dividend stocks has played havoc with many sectors within the US stocks market.  Discretionary stocks have been one of the worst hit sectors, declining nearly 1.5% relative to the broader S&P 500 index.  The selloff in stocks began with investors leaving growth stocks and moving into defensive stocks, and the question is whether it is time for investors to attempt to get back into some sectors that should perform well if growth begins to pick up in the second quarter.

One way to measure how the discretionary sector has performed relative to the broader markets is to analyze a spread between the two sectors. The chart above shows a spread between the Consumer Discretionary Select Spider ETF XLY and the SPY (S&P 500 Spider ETF).  The spread between the two sectors has declined nearly 10% since hitting a high in the beginning of 2014.  The correction could continue another 5% to support near the 0.335 spread support level, but recent retail sales data shows that the US consumer might be stronger than expected.

U.S. retail sales recorded their largest gain in 18 months in March, in the latest sign the economy was emerging from its weather-induced slumber. The Commerce Department reported on Monday that retail sales increased 1.1 percent last month, the biggest rise since September 2012.Retail sales, which account for a third of consumer spending, had risen by a revised 0.7 percent in February.

Economists polled had forecast retail sales, advancing 0.8 percent last month after a previously reported 0.3 percent gain in February.

Core sales, which strip out automobiles, gasoline, building materials and food services, and correspond most closely with the consumer spending component of gross domestic product, increased 0.8 percent in March.

The XLY is resting up against its 200-day moving average which is considered solid support.  The next level of target support for this ETF is seen near the February lows near $61 per share.  Momentum is negative, but turning and could generate a buy signal.  Investors could consider a purchase using the 200-day moving average as a stop.