The consumer staples sector has been one of the strongest sector during the past three months. The performance chart below shows 9 stocks in this group during this period. They clearly outperform the S&P 500, shown on the right.
XLY and XLP are two sector ETFs of the S&P 500. XLY is representing the consumer discretionary sector and XLP representing the consumer staples sector. XLY is considered an offensive sector and XLP a defensive sector. In a healthy, growing economy investors take more risk and money flows in into offensive sectors such as the consumer discretionary sector. For this reason when XLY outperforms XLP it is bullish for the market. The chart below shows the XLY:XLP ratio and as you can see for the most part it was trending higher during the time period shown. On this chart you can see SPY, the S&P 500 ETF too for reference. The indicator window shows the correlation between this ratio and SPY. The correlation is close and stays above 0.50 most of the time. The recent sharp decline of this ratio since March put the correlation coefficient near zero. The sharp decline of the XLY:XLP ratio is just another way to visualize the recent sector rotation. We know that the correlation coefficient is going to move back above 0.50 in the near future. There are two scenarios, either the XLY:XLP ratio is going to turn up or SPY, the market is going to follow the ratio lower. The market won’t able to move higher without the support of the consumer discretionary sector.
As offensive sectors declined money was rotated into defensive sectors. During the past month the utility sector was especially doing well. The market carpet below shows how the utility stocks in the S&P 500 performed during the past month. When the utility sector loses leadership that would be a sign that the equity market found a firm support.
The performance chart below shows how the nine sectors of the S&P 500 were doing during the past six days. As you can see defensive sectors were doing much better. This is usually the case during a correction when defensive sectors are outperforming offensive sectors. Money is moving out of offensive sectors into defensive sectors. Sector rotation is one way to hedge your portfolio. The cycle line helps to indentify which sectors are doing better during different phases of the market cycle.