Leaders are cooling off, laggards are suddenly showing signs of life — it’s choppy.
When things get this messy, I like to fall back on one of the simplest — and most reliable — risk gauges I’ve leaned on throughout my career: the ratio between Consumer Discretionary and Consumer Staples.
To me, this relationship is the clearest read on how the biggest money managers on the planet are positioning.
Remember, large long-only managers can’t go to cash the way we can, and they can’t short either. Their job is to beat a benchmark, no matter what.
So when they’re bullish and want to lean into offense, they overweight Discretionary stocks — retail, housing, autos.
However, when they’re cautious, they rotate into Staples — toothpaste, cigarettes, soda, detergent.
In short, it’s offense versus defense.
When this line rises, investors are generally rewarded for buying stocks. When the line falls, that’s usually a characteristic of corrective waves for stocks.
Right now, XLY/XLP is pulling back into former resistance, threatening to create a major failed breakout and fall back into the old range.
Bulls need this area to hold. If it does, risk appetite remains alive and well. If it breaks, that’s where problems can start.
It’s also worth noting that momentum was unable to reach overbought to confirm this breakout to new highs, leaving us with a nasty potential bearish divergence.
This is a chart I think should be front and center on your screen. It’s one of the best barometers of market health.
So tell me — are you buying? Selling? Sitting tight?
Shoot me an email. I’d love to hear how you’re navigating this tape into the year-end.
Steve and JC are going LIVE today at 12 pm ET to talk about how they’re navigating this messy tape and some of the uncorrelated trades they’re leaning on right now.
