Another Bear Market Theme: S&P 500 vs. Consumer Discretionary Sector Strategy

by: Michael Stokes November 21, 2008 | about stocks: SPY / XLP / XLY / XRT    

Michael Stokes

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In my last post S&P 500 vs. the Energy Sector I shared a theme that has worked very well navigating this bear market: using the relative performance between the S&P 500 and the Energy Sector (XLE) to trade the SPY. That theme has been added to the State of the Market report.

After a little more number-crunching, I discovered another sector that has exhibited a very similar (but different) tendency: Consumer Discretionary (XLY).

2008112101
[logarithmically-scaled]

The graph above shows the result of going long the SPY at Thursday's close if the SPY underperformed XLY on Thursday, and going short the SPY if it outperformed, from October 2007 to the present. The SPY is in blue, strategy results in green, and for comparison, the Energy sector strategy is in red. This test is frictionless.

Note the difference between this and the energy sector strategy. In that strategy, the market outperformed when it led energies, but here it outperformed when it lagged XLY.

This strategy predicted 57% of all days correctly with winners 1.1x larger than losers.

Closing Thoughts…

Why does this strategy work? My readers know I don’t comment on fundamentals, but Dr. Brett has posted some interesting thoughts in the past on this relationship.

I’m calling this a theme (implying it’s temporary), because this relationship wasn’t consistent prior to the start of the bear market. But it’s been strong enough over the last year that I will be tracking it on the State of the Market report in the theme section to help us navigate these very troubled waters.

P.S. Two other sectors exhibited a similar (but weaker) leader/laggard tendency: Consumer Staples (XLP) and Retail (XRT). Also, the tendency was as strong as XLY in Semiconductors (XSD), but this was the case long before the bear market began (read Semis Lead the Stock Market) and that strategy is already part of the SOTM report.

Disclosure: None

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This article has 1 comment:

  •  
    Nov 22 11:50 AM
    I'm a little confused on this one. On the SPY vs. XLE post, Mr. Stokes speaks of the daily closes, implying that the comparison is to the daily price movement and that the position is subject to daily rebalancing. Here, he speaks of a "Thursday" close. Is that an editing mistake, or is he suggesting a weekly comparison and a weekly rebalancing? I'm assuming the former, but a clarification would be welcome.
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