Consumer Discretionary Is Starting to Crack

This chart of the Consumer Discretionary Select SPDR ETF (XLY) provides a strong demonstration of the manic, seemingly unstoppable buying power that can push a market into a seemingly impossible degree of slope. Clearly it is possible but it is also unstable even as a market only goes higher.

 

We know that it is unstable because a parabolic uptrend – by definition – must reverse. This occurs when those manic forces of accumulation disappear. 

 

​But it is not the reversal that counts. Only the reaction out of the reversal and something that is more commonly called a crash in the case of parabolic uptrend reversals. 

 

​Think gold, corn, silver and Apple among many others. Each traded manically higher in relatively short periods of time before reversing course into crashes. 

 

Silver’s initial parabolic bust in May 2011 was particularly stunning with this precious metal shedding more than 30% in one week alone after climbing more than 170% in 6 months.

 

Here’s what that looks like in charted form with the true parabolic uptrend starting where the green arrow is placed and the 30% one-week crash shown by the red arrow.

​Silver went on to make a current all-in decline of 64% from its parabolic top hitting the level of $18.12 per ounce in June 2013 and precisely the level silver was trading at prior to the start of its parabolic uptrend. 

 

​This sort of a reversal is demanded by the laws of physics considering that a ninety degree slope cannot and will not hold even though some parabolic uptrends go on longer and further than seems possible.

 

​Let’s now return to the chart of the Consumer Discretionary Select SPDR ETF (XLY) as shown on the previous page.

 

Its parabolic uptrend makes the one in silver look like child’s play with this security up 360% in just a little over 5 years.

 

Yes, you read that right and you saw it right on the previous page. Consumer discretionary stocks are up 360% since the trough of the financial crisis on the manic momentum shown by trading action that is not quite at a 90 degree slope but rather close and for a prolonged period of time.

 

​Putting aside the important questions of whether the consumer is up 360% and the economy is up 360%, let’s extend our knowledge on parabolic uptrends to XLY and this is to say that XLY appears to be setting up for a crash. 

 

​What is most challenging around “calling” the crashes inevitable to manias and panics is timing, but importantly in relation to XLY, it appears that a parabolic uptrend reversal has already started with XLY’s chart starting to crack and this crack is significant for two reasons. 

First, the reversal in question is “official” with XLY trading below the red trendline marking what looks like the natural slope of its 5-year rally and one that is also the third wave of XLY’s overall rally. When a security drops below the third wave of an uptrend, it is considered to be a true reversal and this is significant for the fact that it signals the likelihood of a downside reaction.

 

In the case of a parabolic uptrend reversal reaction, it is more commonly called a crash as mentioned before and something that starts slowly and happens suddenly making it worthy of being prepared for by getting out of the way. 

 

Second, the stock market crash of 2008 was led by small cap, mid cap and – yes, you guessed it – consumer discretionary. This is shown by the tiny blue trendline in 2006 and 2007 with XLY reversing in June 2007 and many months ahead of the broader markets.

 

It is for this reason, then, that it is so important to recognize that consumer discretionary is starting to crack considering that the S&P may not be so far behind. 

 

As always, thank you for taking the time to read this month’s piece.

Abigail F. Doolittle
Peak Theories Research LLC
www.peaktheories.com
[email protected]
518-391-9313

Abigail F. Doolittle

Abigail F. Doolittle is the founder of Peak Theories Research LLC, which is an on-line research firm dedicated to providing investors with a macro long-term view on the financial markets and the economy. The firm's research begins with the analysis of charts and then ties in various economic fundamentals to better understand the trends pointed to in the charts. She has more than 12 years of experience in the financial services industry.