In 2023, the Consumer Discretionary sector was among the best places to be. Along with the other two growth-oriented sectors (Information Technology and Communication Services) Discretionary stocks outperformed the benchmark S&P 500.
Leadership in 2024 hasn’t been too much different. It’s still Communication Services and Information Technology leading us higher. But the Consumer Discretionary sector has been notably absent from the leaderboard.
Since year-end, only Utilities and Real Estate have been worse.
Despite the underperformance, one thing’s for sure: we’re not looking at a downtrend. After a 3.4% rally over the last week, Consumer Discretionary is a whisker away from setting new multi-year highs.
The next thing we’ll want to see is confirmation from momentum. RSI hasn’t managed to reach overbought territory since December - we’d feel a lot better about the sector’s prospects if buyers proved just how ‘in control’ they actually are.
Momentum has already shown significant improvement on a relative basis. Compared to the S&P 500 overall, Consumer Discretionary has been testing 10-months lows. But momentum for the Discretionary/SPX ratio stayed out of oversold territory on the most recent decline. Further confirmation of that bullish momentum divergence would set the stage for sector outperformance in the weeks and months ahead - consistent with an ongoing bull market in stocks.
The recent surge strength isn’t the product of a handful of mega cap stocks rallying, either. Beneath the surface, Discretionary is even stronger. The equally weighted sector already broke out to new 2 year highs.
And even the small cap sector is in a clear uptrend - something you can’t say about the small caps as a whole.
If we look at the large cap sector’s constituents in relation to their moving averages, we can see that 8 in 10 Discretionary stocks are above their 50, 100, and 200-day moving averages. That’s consistent with the broad strength we’re seeing in the rest of the S&P 500 index.
The stock market is definitely not in a downtrend, and that means we should spend our time looking for stocks to buy.
Digging Deeper
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