The S&P 500 Consumer Discretionary Index (XLY) just closed the week at new all-time highs.
If you’re looking for clues about where the stock market is headed over the coming months and quarters, this is one of the most important tells on the board.
We talked a few weeks ago about what a rotation into Consumer Discretionary would signal for the next leg of this bull market.
Now we’re getting confirmation, with the index breaking out to record highs:
Sector rotation is the lifeblood of bull markets.
And until recently, Consumer Discretionary stocks have been one of the biggest underperformers of this entire cycle.
If there was ever a moment for them to finally step up, this is it.
But here’s the catch: They have to stick the landing.
Failed breakouts are how bull markets end. They’re often the first cracks that lead to a broader bearish regime.
So if you’re in the bear camp, this is the chart you should be watching most closely. The bear case starts with this breakout failing to hold.
I don’t know what the market will do next. But the good news is that no one else does either.
All we can do is make the best decisions possible with incomplete information. And life gets a lot easier once you can accept that.
This is the chart that matters heading into year-end and January.
Can Consumer Discretionary stocks stick the landing?
Because if they can’t, the next few quarters could get uncomfortable.
Consumer Sentiment Hits All-time Low
The good news is that sentiment is completely washed out.
That’s not a bad thing. In fact, it’s usually the opposite.
When everybody’s wildly bullish on the consumer – like they were in late 1999 or early 2018 – that optimism tends to become a headwind for stocks.
Too much confidence leaves no one left to buy.
Today looks nothing like that.
This setup is far closer to 1980, 2009, and 2022 – periods when pessimism was extreme and risk assets were setting the stage for powerful advances.
The chart below comes from Kevin Gordon, head of macro research and strategy at Charles Schwab.
It shows consumer sentiment hitting a new all-time low in December:
If the next leg of this bull market is about to get underway, the consumer should be a leader, and sentiment should improve sharply from here.
That’s a tailwind almost no one is talking about.
But let’s be clear: Sentiment doesn’t pay you. Price does.
And price is already speaking.
The S&P 500 Consumer Discretionary Index just closed at the highest levels in history.
Now it just has to stick the landing.
This Week in Everybody’s Wrong
On Monday, we answered a basic question on a lot of market participants’ minds: Is the correction over?
Well, one of the most important measures of stock market breadth reached its highest level ever last week.
We see broadening upside participation, and we’re positioned accordingly.
On Tuesday, we took on another, more complicated mystery.
Why is the Cboe Volatility Index (VIX) – the market’s “Fear Gauge” – still so elevated with the S&P 500 near all-time highs?
The simple answer is it’s still a bull market, but we must stay alert and respect the volatility.
On Wednesday, we reflected on the fact that Tesla (TSLA) has more than doubled since March and has reached new all-time highs.
That was not a victory lap.
It’s about doing the work, building a case, and getting bullish based on price, trend, and evidence.
On Thursday, we addressed the argument that technical analysis is a “self-fulfilling prophecy.”
The implication is every price pattern and every technical concept works exactly as the textbook says, on every timeframe, all the time.
Of course, this is not at all how markets work.
On Friday, we talked about the basic fact that Wall Street is not baseball.
There are, however, many lessons we can take from that sport, such as patience and discipline.
On Saturday, Grant Hawkridge wrote about buying a new computer.
No, it’s not really as simple as that.
Indeed, our Quantitative Analyst certainly knows how to use the right tools.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs