Amazon.com (AMZN) is the stock market bellwether nobody is watching.
As of this morning, AMZN represents about 22% of the Consumer Discretionary Select Sector SPDR Fund (XLY).
It’s the biggest name in the sector.
Retailers. Homebuilders. Automobiles.
This is where “consumers” spend their “discretionary” income. It’s where they satisfy their “wants” as opposed to their “needs.”
And the consumer accounts for 70% of the U.S. economy. That’s pretty important.
AMZN is the biggest Consumer Discretionary stock in the U.S.
So it just might be the most important stock in the world right now.
We’re watching it for a breakout above 190. But we’re not trading AMZN.
This is more about what the stock and the sector mean for the market at these levels.
We do have a sentiment squeeze to share with you – and it’s the No. 2 Consumer Discretionary stock.
First, though, we need to talk about the sector and whether AMZN is going to be an engine or an anchor…
Let’s Say It Together: “Prior-Cycle Highs”
Consumer Discretionary is the only one of the offensive sectors that’s below its prior-cycle highs:
This is a chart of XLY, a market-cap-weighted ETF.
“Market-cap-weighted” means the largest companies in the group represent larger percentages of the basket.
The ETF is built to track the S&P 500 Consumer Discretionary sector.
Of all the offensive sectors, only Consumer Discretionary is below its prior-cycle highs.
Communications and Technology retested their prior-cycle highs, the same way the Dow Jones Industrial Average, the S&P 500 Index , and the Nasdaq-100 did.
Financials and Industrials did not. They made higher lows.
The key to XLY is AMZN:
It’s basic math. If Consumer Discretionary is going to recover…
If the sector is going to re-join all the other offensive sectors in this ongoing secular bull market…
AMZN is going to be the driver.
Or it’s going to be the brake.
A breakout in AMZN above 190 gets it done.
That would put the largest Consumer Discretionary stock above its prior-cycle highs.
That’s a level for the whole stock market to watch.
Now Let’s Talk About No. 2
People really hate Tesla (TSLA), especially losing vice-presidential candidates.
TSLA is another big Consumer Discretionary stock. In fact it’s No. 2 in the sector in terms of market cap.
We got long TSLA common stock and opened an options position this week.
Management reported earnings on Tuesday. The numbers were terrible. But TSLA rallied anyway.
We love that.
Do you know what else we love?
A bunch of Wall Street sell-side analysts downgraded the stock.
That’s fantastic.
We love it when Wall Street sell-side analysts hate the stocks we’re buying.
There’s a reason why they’re just analysts and not actual portfolio managers.
Like magazine covers and economists, the sell side as a group is a great indicator – particularly when it comes to identifying extremes.
You want to take the other side of the trade from magazines, economists, and analysts at extremes.
Sell-side analysts at Baird, Cowen, Mizuho, RBC Capital, and Canaccord Genuity cut their price targets on TSLA this week… at the same time.
We took that information, and we went long the common stock. We also opened a long options position.
Are you paying attention to how this works?
Stock prices do not move on “fundamentals.” Stock prices move because of positioning.
And right now there’s a divergence here between price behavior and sentiment.
That means “opportunity” for those of us who can recognize it in real time.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs