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Over on his All Star Charts blog, J.C. Parets has a great post up about the relationship between the more defensive consumer staples (XLP) versus the riskier consumer discretionary (XLY) sector. J.C. has followed this relationship closely on his blog for a while now, and I have referenced it on my video recaps regularly, as well. Thus, it is still worth monitoring closely, in terms of gauging the underlying health of the broad market. To sum up the current correlation: So far, so good for the bulls. The XLY has led XLP in 2012, and the S&P 500 has followed suit. As I have discussed many times, it is difficult for the broad market to sustain a bonafide uptrend with the defensive sectors leading, as the lack of risk appetite soon comes back to haunt steadfast equity bulls.
As J.C. says about his chart below:
We see how important it can be for this ratio to confirm. We are now at a critical level for $XLY:$XLP. The downtrend line from last February has been penetrated to the upside – that’s a good thing. So now that we have higher lows in place, we need to see higher highs for confirmation of the S&P 500′s action.
We’ve been saying all year that the right sectors have been leading this market higher. All signs point to new highs in this ratio, but I wanted to point it out this morning because I think a divergence here could spoil all the fun.
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Chess, I just tried the dog driving the car line on my wife….didnt work. 😉