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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Traders look through countless pieces of data to help gauge the health of the economy.
There are all the usual items that you see on the financial news like the GDP, the unemployment rate, wage growth, and inflation.
Along with factors like new home and car sales, construction spending, manufacturing, and production data.
In their own way, each helps tell a piece of the economic story.
But for me, there’s something else I watch just as closely – consumer spending.
Private consumption is the basis of any advanced economy. In the U.S., it accounts for nearly 70% of GDP.
Now, if you’ve sat through any Economics 101 class, you’ll be familiar with the two major spending types…
- Staples – essential things like food and beverages.
- Discretionary – non-essential goods and services… like luxury items and vacations.
I usually watch the second spending type because when discretionary spending slows down – so will the economy. And that’ll have a knock-on effect for stocks in that sector.
But rather than looking at individual stocks, one way to look at the sector as a whole is through the Consumer Discretionary Select Sector ETF (XLY).
So, let’s look at the chart for that stock now…
Here, the chart shows the period from the market bottom in March 2020 to now. From bottom to top, XLY rallied 126%.
That high – the top of the rally – was just under $185 back on July 29. After that, XLY traded sideways, before breaking lower.
Not a big move lower… but just enough to get my attention.
On the price chart, the red line represents the 50-day moving average (MA) showing the long-term trend.
Below the XLY chart is the Relative Strength Indicator (RSI). Over the past few weeks, we’ve used it to show when a stock is overbought and oversold.
When the XLY share price has fallen below the long-term MA (red line), that has coincided with a trough in the RSI – marked by the red arrows.
This has happened six times since September 2020.
After each of those six troughs in the RSI – XLY has rallied. Not only back above the red line, but onto a new high. Meaning, so far, this scenario has turned out to be a bullish setup.
Right now, you can see the RSI is again heading into oversold territory. So, what happens next is crucial…
For the uptrend to remain intact, XLY will need to break back above the red line (50-day MA) and go on to make a higher high. That means breaking above that high of almost $185 from back on July 29.
If not, that could mean that the XLY trend is rolling over… showing that discretionary spending could be slowing – and it could put a handbrake on the economy.
This is setting up for an interesting potential trade. The price action over the next few days will likely give us a clue as to whether the trend remains upwards… or if we’ll see a bigger move lower.
It’s definitely one to watch.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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