There is quite a bit of newsprint lately regarding the US "fiscal cliff"; and the impact of whether it goes through or not. Regardless or not of whether it is extended or not, we think it instructive to analyze the consumer discretionary stocks as they will be inordinately impacted.
First, let us state that since the 2009 bottom, consumer discretionary stocks have rallied rather strongly through the halcyon days of the mortgage "cash out" period in which money were flowing towards all sorts of goodies. Thus, we were rather surprised at the veracity of this rally given the end of the housing bubble and the negative impact of the "cash out" refinancings. If fact, the current rally has continue to levels were never thought possible. However, there are there, and now we believe they represent an opportunity to be short a number of names int he group, or via the S&P Consumer Discretionary ETF (XLY) itself.
Second, the technical situation has begun to show signs of breaking down. The rising trend-line off the 2009 and 2001 lows was just violated, which should allow prices to plumb towards lower levels and into major support at the 120-week moving average rising towards $40.00. However, we would posit the decline will be deeper into the shaded area as this represent prior low and high support, as well as the 38.2% retracement moves. Too, the 200-week moving average crosses inside of it. This grouping if you will tends to act like a magnet - especially given the 30-week stochastics has formed and confirmed a negative divergence. Also, note the distance above the 120-week moving average in the PPO frame; it hit just above 20%, whereas in the past this has proven to be extremely good resistance.
Collectively, we would say that all the moons are lining up for traders to start exiting Consumer Discretionary shares and buying other sectors that have better defined risk-reward parameters. Certainly at TRR we will be putting our our recommendations for short positions soon; and perhaps acting upon them as well.
Good luck and good trading,
Richard
