Consumer Discretionary / Staples Ratio – Flashing Caution!

May 25, 2011 | 0 comment

Over the past month, the S&P 500 and other broader market indices have weakened. Many are quick to say this is the “pause that refreshes” while others may simply say the cyclical bull market has run its course and sharply lower prices are ahead. At this juncture, it is far too early to determine given the end of QE-2 and the weakening of the world economy in tandem. This could very well be a recipe for QE-3 sometime in the historic seasonal low in the October-November time frame.

Shorter-term, we are of the opinion that further losses are likely in the broader market averages, with rallies considered nothing more than countertrend rallies that will give way to selling pressure. The Consumer Discretionary/Staples ratio supports our thesis, for from a technical perspective – it is breaking down on a weekly basis below important support levels such as the rising trendline off the 2008-2010 lows, and the 40-week moving average. This changes the forecast to “lower”, and we’ll simply state that a normal 10% correction lower is to be expected in the least, which something more always possible.

In any case, the ratio signals “defense” is on the field, and when this is the case – stocks typically move lower. And until we see the ratio stabilize and the stochastic turn higher – then traders and investors should be cautious.

Richard Rhodes is the founder of Rhodes Capital Management, Rhodes Trading Group, and The Rhodes Report a macroeconomic and stock trading newsletter. The Rhodes Report seeks an absolute return through a long short strategy that trades equities, ETFs, and inverse ETFs that offer the greatest potential for positive portfolio returns in both bull and bear markets.

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