Market Overview

The Tussle Between Two Big Consumer ETFs Is Telling

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Stocks have started the year in concerning fashion. Speaking of concerning, that is one of the words that can be used to described the early year performances by some of 2015's leadership groups.

For example, consumer discretionary was last year's best-performing sector as the Consumer Discretionary Select Sector SPDR (NYSE: XLY), the largest exchange traded fund tracking the consumer cyclical space, rose nearly 10 percent in 2015. Some familiar names drove XLY higher last year

That group includes XLY's largest holding, Amazon.com, Inc. (NASDAQ: AMZN), as well as some of the Dow's best performers in 2015, namely Home Depot Inc (NYSE: HD), McDonald's Corporation (NYSE: MCD) and Nike Inc (NYSE: NKE).

The new year has been a different ballgame for consumer stocks as XLY, with its loss Friday, will have traded lower in each of 2016's first five trading sessions. The Consumer Staples Select Sector SPDR (NYSE: XLP) closed the day lower, bringing its 2016 streak to a loss in a four of five days, but investors have been displaying a preference for XLP and that is not necessarily good news for those expecting a big rally in stocks this year.

XLP, the largest staples ETF by assets, has added nearly $138 million in new assets this year, a total exceeded by just six other ETFs. Conversely, investors have yanked nearly $212 million from XLY. That is just one data point, but it says the XLP/XLY is strengthening, meaning investors are favoring less risky staples names such as The Coca-Cola Co (NYSE: KO) and Procter & Gamble Co. (NYSE: PG). Average investors ought to monitor XLP's performance relative to XLY because this is something professionals pay attention to.

"Technically, the two highest rated, and most well-known institutionally ranked technicians, are making strong cases that a tactical low in the S&P 500 has not been put in place and that the sector rotation, especially into Staples and away from Discretionary, will continue. As you can see below the Staples sector is breaking out to start 2016," said Rareview Macro founder Neil Azous in a note out earlier this week.

Azous also points out that XLP's ratio to the S&P 500 resides at its highest levels since late 2013 while the XLP/XLY ratio is at highest levels since early 2014.

Since 2010, there have only been two years in which XLP outperformed XLY: 2011 and 2014. The S&P 500 gained 1.9 percent and 13.5 percent, respectively, in those years.

 

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