RETAIL STOCKS HAVE A BAD CHART DAY -- THAT'S STARTING TO WEIGH ON RELATIVE PERFORMANCE OF THE CONSUMER DISCRETIONARY SECTOR WHICH APPEARS TO BE LOSING UPSIDE MOMENTUM -- CYCLICAL STOCKS ARE ALSO LOSING GROUND VERSUS DEFENSIVE CONSUMER STAPLES
RETAIL SPDR TUMBLES TO TWO-MONTH LOW... Retail stocks are having a bad chart day. The daily bars in Chart 1 show the S&P Retail SPDR (XRT) falling to the lowest level in two months, and trading below its 50-day average (blue line) by the widest margin since March. Earlier buying of retail stocks this year was hailed as a good sign for consumer spending and the economy. Recent retail selling doesn't support that optimistic message. By itself, today's selling might not be too concerning. The bigger concern is that continued retail selling may start to weigh down consumer cyclical stocks which are already starting to lose some upside momentum. Cyclical stocks are also in danger of losing their 2018 leadership role..
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Chart 1
CONSUMER CYCLICALS ARE LOSING UPSIDE MOMENTUM... The daily bars in Chart 2 show the Consumer Discretionary SPDR (XLY) dropping today, but not far from its September high; and still well above its 50-day average (blue line). But the XLY is losing upside momentum. Its 14-day RSI line (top box) dropped during September, and is dangerously close to falling below 50 for the first time in two months. Its daily MACD lines (overlaid over the price bars) have been in negative alignment for a month. Note also that the early September peak in the MACD lines was well below the peak reached during June. That "negative divergence" is another sign of a weakening uptrend. The XLY is also starting to some upside market leadership.
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Chart 2
CYCLICAL SECTOR MAY ALSO BE LOSING LEADERSHIP ROLE... Consumer cyclicals have been the market's strongest sector since the start of the year. But it's now in danger of losing that leading role. The solid line in Chart 3 is a relative strength ratio of the Consumer Cyclicals SPDR (XLY) divided by the S&P 500. Notice that the ratio peaked in mid-June and has yet to exceed that summer peak. A second attempt at a new relative strength high during September appears to be failing. The ratio line itself has also fallen below its 50-day average (blue line) and may be headed toward a test of its August low. Loss of market leadership by such an economically-sensitive market sector could also carry a warning for the market as a whole.
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Chart 3
XLY IS ALSO LOSING GROUND AGAINST CONSUMER STAPLES... One of the traditional ways to gauge short-term market sentiment is to compare the relative performance of economically-sensitive cyclical stocks to defensive consumer staples. That relationship, however, is also starting to weaken. Chart 4 plots a ratio of the Consumer Discretionary SPDR (XLY) divided by the Consumer Staples SPDR (XLP). After rising consistently over the last year, the ratio peaked in June and has been treading water since then. Two rally attempts over the last month appear to have failed. Today's drop in the XLY/XLP ratio threatens to weaken its trend even further. Consumer cyclicals are today's weakest sector. While defensive consumer staples (and utilities) are the two strongest sectors. That may be an early warning that investors are turning a bit more defensive.
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Chart 4
SMALL CAPS ARE ALSO DROPPING ... Small cap stocks, which led the market higher during the first half the year, are also losing their leadership role. The daily bars in Chart 5 show the Russell 2000 Small Cap Index falling to the lowest level in two months, and well below its 50-day average (blue line). The red line, which is a relative strength ratio of the Russell 2000 divided by the S&P 500, has tumbled to the lowest level since March. That may have something to do with the reduction in trade tensions favoring larger multinational stocks. But it could also be an early warning that the stock uptrend is losing some momentum.
