Founder’s Note: A few weeks ago I got a call from James Altucher, a former hedge fund manager and entrepreneur…
He invited me to share an AI secret with readers in an online strategy session.
I join James on set after the first couple of minutes… – JC
The index of Consumer Discretionary stocks closed last week at its highest levels ever.
No other consumer in the world is as good at spending money as the American consumer.
In fact, consumer spending represents a significant portion of U.S. GDP, making up approximately 70% of economic activity.
The Consumer Discretionary sector is doing well, and that usually doesn’t happen during times of weakness.
Higher prices for Consumer Discretionary stocks usually means higher prices for the stock market overall.
Different Types of Consumer Stocks
You have your Consumer Discretionary stocks, which are making new all-time highs, and you have your Consumer Staples stocks, which definitely are not doing that.
The stocks that make up the Consumer Discretionary index include the types of companies where “Consumers” spend their “Discretionary” income – things like Retailers, Automakers, and Homebuilders.
In the Consumer Staples basket, you mostly have the types of purchases Consumers would be making regardless of how bad the economy is – think toilet paper, tooth paste, beer, cigarettes, and potato chips.
When you look at the ratio between these two groups, you get a good idea about the overall flow of money into the market.
Here you can see the ratio hitting new all-time highs – favoring the Discretionary side of the equation over the Staples:
If this ratio is hitting new all-time highs, we are probably not in a bear market.
This is the type of evidence we look for to suggest we should be spending a good portion of our time looking for stocks to buy, not looking for stocks to sell.
Long-Only Managers
The U.S. mutual fund industry represents approximately $20 trillion to $30 trillion in assets, depending on who you ask.
The bigger point here is that there is a lot of money being managed this way, by these types of fund managers.
For the most part, these portfolio managers have to be fully invested in stocks at all times – no cash, no bitcoin, no bonds, no shorting.
The way they get their bonuses is to outperform their benchmark, usually the S&P 500.
If the S&P 500 falls 20% but their portfolio only drops by 10%, they get a big fat bonus.
This “outperformance” over their benchmark is what is referred to as, “alpha.”
In order to generate this “alpha” during bull markets, they tend to overweight the more offensive Consumer Discretionary stocks and underweight the more defensive Consumer Staples.
During bear markets, you’ll see the opposite, as money flows much faster into Consumer Staples, as a safe haven, and out of the more aggressive Consumer Discretionary stocks.
That’s how the world works, so that’s what we pay attention to.
What’s the Biggest Risk?
I’m watching the offensive groups – particularly the Consumer Discretionary stocks that just closed at a new all-time high for the first time in 2025.
These are the new guys in town, so theoretically they’re the most vulnerable for reversion.
I think if the Consumer Discretionary Select Sector SPDR Fund (XLY) is above last year’s highs, there is little to be overly concerned about in this market:
However, if we start to slip, and you begin to see XLY back below 230, that would be the first sign that perhaps something is starting to go wrong.
If you’re in the bear camp, and you think this is all a house of cards that’s about to come tumbling down, so you’re “one of those,” this chart needs to be front and center.
The bear case, in my opinion, begins with this index falling back below last year’s highs.
To be clear, that has not happened, and I am definitely betting on this uptrend continuing.
But I do want to be aware of all possibilities.
And I do want to identify – before the fact – what would need to happen in order to bring on a new level of risk to this raging bull market.
I bought one of the largest Consumer Discretionary stocks yesterday.
So my bet is still up.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs
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