The American consumer is a powerful beast.
My fundamental friends love reminding me that consumer spending makes up roughly 70% of U.S. GDP.
I still don’t know what a GDP is, but 70% of anything sounds like a big deal.
Here’s the real story: Consumer Discretionary hasn’t been worth writing home about in ages.
Relative to the S&P 500, Consumer Discretionary has been in a straight downtrend for the entire cycle.
If you just owned the S&P instead of overweighting this sector, you crushed it. Discretionary simply hasn’t been a good place to allocate capital.
But that may finally be changing.
Rotation into Discretionary
Here’s the S&P 500 Consumer Discretionary ETF (XLY) working on completing a multi-year base that stretches all the way back to the 2021 highs.
We’ve had a few false starts along the way, but we still haven’t seen a true, decisive breakout:
During bull markets, everyone gets a turn. So when we talk about one of the most offensive sectors in the market, this is certainly in the queue for a period of outperformance.
Consumer Discretionary has paid its dues, and now it’s time.
The Sum of the Parts
Quick reminder: This is a market of stocks, not a monolithic “stock market.”
And the drivers inside Consumer Discretionary matter.
Start with Tesla (TSLA) — now more than 20% of the entire index. Look at this monster base coming off a 3,000% run during the last cycle:
Tesla is one of the strongest stocks ever. No company in history has gone from an $80 billion market cap to $1.3 trillion in less than two years.
Since then, we’ve seen a well-deserved consolidation that, more often than not, resolves in the direction of the underlying trend — which is still overwhelmingly up.
And let’s be honest: Some of the worst investors on the planet have been pounding the table to short Tesla every single day on Twitter.
I track a few of these sociopaths — people with a documented talent for losing money consistently — and they are, once again, fighting a very powerful trend.
That’s a tailwind for the bulls. If anything, it’s a gift.
Remember: You don’t need to be the smartest investor. It’s much easier to identify the worst ones — then simply do the opposite.
Where Consumers Can Buy Anything
Meanwhile, Amazon.com (AMZN) is still the largest weight in Consumer Discretionary, but only by a few basis points over Tesla. Together, these two stocks make up more than 40% of the entire index.
Here’s Amazon pressing up against new all-time highs:
If you’re looking ahead to the next leg of this bull market, you have to ask, which sectors have the most upside torque?
Consumer Discretionary has been a laggard. Its top two components haven’t even broken out yet.
So think about what happens when both of these names resolve higher — and what that does to the entire Consumer Discretionary sector.
And when you move down the cap scale and look at small-cap Consumer Discretionary, you’re seeing the same thing: another massive base that looks ready to finally complete.
It might feel slow and frustrating, but the old saying still holds: “The bigger the base, the higher in space.”
And that’s exactly what we’re looking at — massive bases in some of the most important stocks in America.
If you’re shorting these names, you’re fighting gravity. The path of least resistance is higher — and not just a little higher. Potentially much much higher.
As far as I’m concerned, Consumer Discretionary is one of the cleanest vehicles to ride the next leg of this bull market.
And when this thing finally launches, you’re either on board… or you’re left behind.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs