Corey Rosenbloom: If history repeats as it did in 2011, then we should heed the message of caution from the Consumer Discretionary/Staples Relative Strength Chart.
Let’s take a look at the current message and compare that to a very similar pattern from 2011.
The chat above shows the S&P 500 Daily Chart in a strong uptrend into the 1,900 index level.
Beneath the chart are the XLY (green) which is the Consumer Discretionary (think “Retail”) sector which tends to outperform during good economic times and the XLP (red) Consumer Staples Sector fund which tends to outperform during challenging economic times.
We can compare these individually or we can simplify the chart by plotting the Relative Strength Line which shows changes in the relationship clearer on a line graph. That’s what I’m showing on the middle panel labeled “XLY:XLP” which gives a clearer picture of the relationship.
When the line is rising (as it has during the majority of the bull market), the “Risk-On” Discretionary Sector is outperforming the “Risk-Off” Staples Sector and a rising line suggests “all is fine” with the market.
However, a reversal and decline in the relationship highlights out-performance in Staples or the Defensive Sector which then suggests “all is not well” and that caution should be our main focus.
We see a rising relationship throughout the duration of the chart, only to see a clear trendline break and downward reversal in March.