Surprising Sector Holding Up Best

Since the S&P 500 hit its recent peak of 1,217 on April 23rd, it’s fallen by 13% through yesterday’s closing price of 1,055. It violated (fell below) its longer-term term 200-day moving average on May 20th, and has traded below that important trend indicator since then. Along the way, 9 out of the 10 broad S&P sectors have also fallen through their respective 200-day moving averages (using sector ETFs), essentially “confirming” the weakness in the broad market. Can you guess the one sector that hasn’t broken down in the same fashion yet?

The obvious answer would seem to be one of the typically defensive sectors – Consumer Staples, Health Care, or Utilities. But, those would be all be wrong in this instance. The correct answer is the Consumer Discretionary sector. Consumer Discretionary has been outperforming the broad market since the first credit crisis bottom on November 20, 2008, and has been an outright market leader for much of the time since then.

The reason that the sector’s recent resilience, and its impressive performance for the past year and a half, is “surprising” is that many pundits had written off the consumer as dead, opining that a new era of frugality is upon us as a part of the fallout from the housing bubble and credit crisis. While that may turn out to be true over a longer time period, it hasn’t mattered much in the shorter-term, as the sector has clearly been exhibiting its traditional “early cycle” traits in spite of those sentiments.

Chart: Consumer Discretionary Sector ETF (Symbol: XLY) with 200-day moving average