— RSL (@rsandbachlaw) December 30, 2019
Earlier today, we asked our Twitter followers: What is the most important chart you’re watching heading into the new year? This chart from @rsandbachlaw was one that we thought was worth highlighting. It’s a ratio chart of the Consumer Discretionary ETF, $XLY, versus the Consumer Staples ETF, $XLP. This ratio serves as a useful risk-on/risk-off indicator for the broader stock market. Consumer Discretionary ($XLY) is the more aggressive of the two sectors and tends to outperform in risk-on environments. Conversely, the Consumer Staples sector is less-risky and outperforms in risk-off situations. Even in a recession, consumers will continue to buy staples like toilet paper, soda, and cigarettes and avoid discretionary spending at places like Starbucks, Amazon, and Nike, all of which are components in $XLY. As you can see, the ratio has been somewhat trendless over the past year. However, it’s coiling up for a big move. If it breaks higher from this coil, it would indicate that Consumer Discretionary stocks are outperforming Staples, which would send a bullish message to the broader market. On the other hand, if it resolves lower, it would suggest a lack of risk appetitie in the market. Tell us what chart you’ll be watching in 2020.