Price Action & Performance
XLY has been a material laggard since July 13, 2023 off more almost -10% vs. the benchmark since that date. Only legacy defensive sectors have shown weaker performance during that time. There have been some stand-out performers within the Sector. AMZN is still an excellent chart and a worthy long from this perspective. TSLA, though bouncing in the near-term looks like a short. At the Industry level, homebuilders (DHI, LEN, PHM) have been propping up the durables space while many other areas (Autos, Auto Components, Textiles, and Specialty retail have been deteriorating over the past 9 months.
Economic and Policy Drivers
The Consumer Discretionary Sector is ground zero for the inflation fight as the rising cost of housing, fuel, education, and other services gnaws into household discretionary spending. Some areas like value oriented fast-food chains (CMG, DPZ, MCD) and off-price retail (TJX, ROST) hold up. AMZN continues to act like a beneficiary as well. However, spending weakness is apparent in the home improvement category (HD, LOW), within the Automotive categories and across parts of the travel and leisure industry as well. Homebuilders which have been a stand-out are starting to lag as well, as interest rate policy makes homes unaffordable for more people.
How Can XLY Help?
XLY offers the broad exposure needed to shift allocation at a low cost when prospects for the Sector are uncertain. With 52 stocks across 9 industries, XLY shares offer diversification at an affordable price. If sticky inflation turns out to be less sticky when the CPI prints on May 15, investors can jump on the change in trend by increasing allocation to the broad array of industries that will have likely been oversold to the downside. In the meantime, we can keep a tactical UW exposure on the Sector to add alpha during the current corrective period.
In Conclusion
XLY is in the eye of the inflation storm and performance has lagged over the intermediate term as the central bank keeps the caution flag up on the economy and higher fuel costs and finance costs crimp the consumer. I would recommend an underweight exposure to XLY for the month of May at this time.
Chart | XLY Technicals
- XLY has lost upside momentum and finds itself in a relative downtrend dating back to July of 2023
- A move to new highs above $185 would be a technical sign that the negative trend is changing for the better.
