After 3 years, the Consumer Discretionary versus Consumer Staples ratio has exceeded its previous cycle highs from 2021.
Here’s the chart:
(right-click and open image in new tab to zoom in)
Let's break down what it shows:
The black line in the top panel is the S&P 500 Consumer Discretionary price.
The blue line in the middle panel shows the relative ratio of S&P 500 Consumer Discretionary versus S&P 500 Consumer Staples.
The black line in the bottom panel is the S&P 500 Consumer Staples price.
The Takeaway: As you have probably noticed, I have been focusing on bearish data points over the past few weeks, but it's always important to highlight some key bullish data points, particularly the breakout of this relative ratio from a 3-year base.
This chart is one of my favorite ways to measure risk appetite. It compares discretionary stocks, which include products and services consumers buy with their discretionary incomes, versus consumer staples, which consumers will buy regardless of how bad economic conditions get. By comparing these two consumer sectors, we get valuable insights into whether market participants are positioning themselves defensively or embracing risk.
In healthy environments, Consumer Discretionary regularly outperforms Consumer Staples. Therefore, how this ratio reacts from here will provide excellent information about how investors are positioning themselves for the rest of the year.
If we're going to see any type of meaningful correction in stocks, I believe you're going to start to see this ratio roll over sooner rather than later.
Until then, this data point will be in Bull's bucket.
Grant Hawkridge | Chief Aussie Operator, All Star Charts
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