**For those investors new to our approach to market analysis – Here’s a quick summary.
We have a top-down approach to market analysis. Meaning we begin our process by first identifying which of the Asset Classes is strongest relative to all others. Once identified, we focus our attention to the sectors within that Asset Class, ranking each sector, to determine what sectors show the highest level of institutional demand. We then lift the hood of those sectors to identify the strongest sub-sectors with which to invest.
After falling sharply in February following the COVID-19 outbreak, U.S. Equities once again found itself as the strongest Asset Class on August 25th and hasn’t looked back ever since.
The consumer discretionary sector moved into the top 4 sectors on May 27th and are now ranked #2 out of the 11 broad domestic sectors that we track.
According to data released Friday (10/16) by The Commerce Department, retail sales (at stores, restaurants, and online) surged 1.9% in September. Retail is a sub-sector of the broader consumer discretionary sector.
This marks the fifth consecutive month of increased retail sales. That’s called a trend, ladies and gentlemen. And we like identifiable trends!
Now, you, like many others, may be scratching your head – saying it doesn’t make sense. We have so much bad news – whether it’s COVID-19, Unemployment or Election year rhetoric, how can discretionary stocks be surging?
Here’s the simple answer. The market doesn’t care if it makes sense to you… Or, I should say, the “smart money”, the big institutions – the real drivers of stock prices, they don’t care. They’re buying up discretionary stocks and will be very happy if you don’t take notice for a while. Don’t worry, they’ll sell you their shares sometime in the future – at much higher prices!
I’ve written about this over the past several months, and we’re revisiting the trade in discretionaries today, as we see continued strong demand for stocks associated with home improvement, auto’s, and online shopping.
Home improvement giants, like Home Depot (HD) and Lowe’s (LOW) are either matching or making new all-time highs.
Online used car retailer Carvana (CVNA) continues an impressive run higher.
And what do you say about the technology-centric online retailers: Overstock.com (OSTK), Etsy (ETSY), and Wayfair (W)? Overstock.com is up nearly 1000% on the year and that’s after falling well off its prior highs.
If you’re like us and prefer to avoid individual stock ownership, many of the individual names mentioned above are holdings in the SPDR S&P Retail ETF XRT, so those looking to gain diversified exposure in the space may consider XRT.
This retail fund has crushed the performance of both the broader consumer discretionary sector ETF, XLY and the S&P 500 over the 1-month, 3-month and 6-month timeframe.
For those looking for individual stock exposure and interested in digging in a little deeper – here is a list of the top holdings of XRT.
As long as consumer discretionary stocks remain in the top 4 U.S. sectors and as long as the relative-strength relationship between consumer discretionary and consumer staples are in favor of discretionary, then the weight of the evidence suggests owning consumer discretionary stocks.
And as we can see in the chart below, the relative-strength relationship between discretionary vs. staples is at all time highs. As long as this relationship remains intact, then I see no reason not to invest in the “risk-on” side of consumer stocks – discretionary.
As always, we will be keeping an eye on these relationships and many others updating you each week here in ADAPT.
Until next week, invest wisely…
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