Consumer Discretionary Stocks Still in the Lead

Practically one in two (or 52%) of Americans spend more money than they make… at least a few months each year. Some dig into savings to make up the difference. Some adjust their spending downward the following month to compensate.

Twenty-two percent rely on credit cards to bridge the gap. This, of course, makes Rodney’s head spin… and so would the $22.5 billion in credit card penalty fees that consumers paid in 2011.

I suppose it’s just the American way… a necessary evil on the long, winding road toward the American Dream… [which I immediately follow up with a long, theatrical sigh].

These bits of information are what I call the “econostats”… the statistics that speak to the state of our economy. They’re useful. They tell us that consumers are still spending. They tell us which categories of spending are rising or falling.

But much of the data is published on a delay, so it’s hard to make the connection between what this data suggests about the state of our economy, and the reality of the stock market’s day-to-day moves.

For that, I watch stocks. Specific stocks. In specific industries… and entire sectors.

I’ve written before on the relationship between the consumer discretionary and consumer staples sectors. Here’s a chart of the Discretionary/Staples ratio I shared last time:

See larger image

To create this chart, I used a calculation with the SPDR sector ETFs, XLY and XLP.

Remember, when the ratio is rising… it indicates outperformance of the consumer discretionary (XLY) sector. That’s a sign of underlying strength in the stock market. When consumer discretionary stocks are beating consumer staple stocks, you know that consumers and investors seem to have more confidence, and the means, to spend and invest.

That’s what’s happening now.

The ratio is making new highs… suggesting the market still has legs to run higher.

Just yesterday, I sent a Trade Alert to more than 500 new subscribers to my just-released research advisory service, Cycle 9 Alert. I recommended a specific company to buy a consumer discretionary stock that also has ties to the technology sector, which is currently at the top of my Leaders & Laggards board.

These two sectors have been the #1 and #2 strongest sectors in the market for the past three weeks, according to the proprietary ranking system I use in the Cycle 9 Alert service. So investing in a stock that straddles both sectors should ensure we stay on the leading edge of this short-term trend.

Plus, in yesterday’s alert, I recommended my beta-testers, who’ve been helping me put my service through its paces since November, lock in gains of up to 75% on an Energy sector play we’d gotten into in February, when that sector was ranked #1 and leading the market higher.

And that’s the beauty – and yes, power – of what I’m able to do with Cycle 9 Alert. Even as the American economy struggles to regain its strength of yesteryears, there is always a sector or two that performs better than the rest. I identify them. Then we profit from them. You in?