With the holiday shopping season here,Americans no doubt will be
ringing up the cash registers as they embark on their
annual holiday shopping spree.
Consumer Discretionary (NYSEARCA:XLY) companies such as
Amazon(NASDAQGS:AMZN), Best Buy, and Starbucks will all see
increased sales the next month, many even making a substantial
amount of their yearly profits in the coming weeks.
But just because companies are going to earn significant amounts
of dollars over the next month and their revenues will likely rise
year over year does not necessarily mean they will be good
Even more, how do you even choose between Ford Motor Companyor
) or between the larger Consumer Staples (NYSEARCA:XLP)companies of
Wal-Mart or Proctor and Gamble (
At some point valuation needs to be considered.
To Invest or Not to Invest, that is not the only
More often than not the investment decision is not as
straightforward as simply to just invest or not to
invest. Once we decide to put money to work we also must then
choose how and where.
This usually involves some technique such as ratio analysis or
discounted cash flows, but often it can be as easy as looking at a
Take a look at the chart below, which we provided to subscribers
in our December
Comparing Apples to Apples
The chart above shows the Consumer Staples Select Sector SPDR's
(NYSEARCA:XLP) price divided by the Consumer Discretionary Select
Sector SPDR's (NYSEARCA:XLY) price through time. Looking at
the charts can sometimes help take the guesswork out of typical
stock research, like what will earnings do, or how many televisions
will Best Buy sell this holiday, and this chart is no
It shows us which sector has been bought up in price more than
the other and therefore which sector is relatively cheap right now
compared to its past price relationship with the other
sector. It also shows us which sector is a better value right
Techniques that Work
Utilizing a similar relative strength technique and outlined in
our article "TheTwo Month Vix Cycle" helped us capture an 84% gain
back in May when we suggested in our Newsletter to buy VIX July $13
call options for $370. When the VIX (NYSEARCA:VXX) rallied
into the upper teens we cashed out, and again we are watching
another similar VIX setuptoday as the VIX falls back to cheap
The above technique shows when deciding to invest in
Discretionary (NYSEARCA:VCR) or Staples (NYSEARCA:VDC), the Staples
are nearing their low point in valuation and thus their high point
in value proposition.
Since the 90's and shown in the chart, the Consumer Staples
sectorhas never cost less than 60% of the cost to own the
comparable Discretionary ETF. At 67% today it sits near its
historical lows compared to what it will cost you to buy a
comparable share in the DiscretionaryETF. This implies XLP
should outperform going forward, just as it did from 2000-2001 and
2005-2009 with much less downside risk. In a similar
scenario, XLP would outperform XLY by over 40% the next few
Put another way, Consumer Discretionary stocks are reaching
their upper extremes of valuation, and are thus expensive when
compared to Consumer Staples.
Long term investors deciding which sector to buy should choose
Staples if they are looking for the better long term value.
Profit Strategy Newsletter
utilizes technical analysis such as relative strength to help
investors make high probability trades. We also provide weekly
picks and a twice weekly Technical Forecast with a focus on the
shorter term trends of all asset classes.
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