Market Overview

Consumer Discretionary ETF Woes Continue

Consumer Discretionary ETF Woes Continue

After hitting a new all-time high in the first days of March, the consumer discretionary sector has been slowly bleeding lower as skittish investors pull back on growth stocks.

The Consumer Discretionary Sector SPDR (NYSE: XLY) and Vanguard Consumer Discretionary ETF (NYSE: VCR) are two of the largest ETFs that track a basket of companies engaged in non-essential consumer goods or services.  

This sector is typically dominated by media, specialty retail, entertainment, and automobile manufacturers that end to be more sensitive to consumer activity during different phases of the economic cycle. 

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Both ETFs were stellar performers in 2013 as growth and momentum investors piled into this arena.  However, the combination of profit taking, higher volatility, and a shift to defensive sectors has prompted an exit from high flying stocks like Amazon (NASDAQ: AMZN) and Priceline Group (NASDAQ: PCLN). 

Both companies are top holdings in these ETFs and have declined significantly from their 2014 highs. 

A specialty group of consumer discretionary stocks that bears close attention are consumer retail companies.  The SPDR S&P Retail ETF (NYSE: XRT) tracks an equal-weighted mix of 100 companies in apparel, specialty, and automotive retail stores. 

This ETF has decoupled from the price action of the broader market and just recently pierced its 200-day moving average on the down side.  So far this year, XRT has declined nearly 6 percent and still has additional room to retest its January lows. 

Clearly investors are concerned about weather related problems and other seasonal factors clouding the picture for retail stocks this year.   

On Monday of next week, retail sales numbers for March will be released that will be a key wrap-up of consumer activity in the first quarter of the year. 

That economic statistic is likely to play an important role in the future price action of these temperamental ETFs. 

The consumer discretionary sector appears to be in the midst of a pullback that will test the resolve of the bulls moving forward. 

In order to stabilize, we are going to need to see aggregate retail statistics and key company earnings or product announcements come in better than expected over the next several weeks.    

Any additional bumps in the road may be a leading indicator of economic activity that sends this sector even lower.  


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