Consumer discretionary stocks recently entered a correction…
The sector dropped more than 10% from its peak on May 28 to its July 23 low. Meanwhile, the S&P 500 Index fell just 2% over the same period.
That’s a notable dip. The consumer discretionary sector hasn’t been under that much pressure since March.
But we don’t think the recent plunge will mark the end of this sector’s longer-term bull market.
In fact, consumer discretionary is already bouncing back. And two powerful signals suggest these stocks will keep soaring from here…
Consumer discretionary companies sell products that folks don’t need. Instead, these businesses sell “wants.”
They’re often the first stocks investors worry about when household budgets get squeezed. And today, with higher gas prices and inflation still to contend with, we’d expect people to cut back on spending on luxury goods.
But that’s not happening at all.
According to Velera, the largest credit-union servicer in the U.S., June marked the strongest year-over-year growth in debit- and credit-card spending since 2022.
So folks are still swiping… even with higher prices at the gas pump.
Still, consumer discretionary stocks took a big hit recently. Again, the sector fell about 10% from its May high.
That disconnect suggests the market may have turned too pessimistic. These stocks are now back on the rise, with two technical indicators suggesting the rally will continue…
Two Signals Say Discretionary Stocks Can Keep Rising
Our first bullish signal is the relative strength index (“RSI”). The RSI tells us when an asset’s price moves too far, too fast in either direction.
When investors drive prices up, the RSI climbs. A reading above 70 represents an “overbought” signal – showing prices have risen too fast.
On the flip side, the RSI falls when investors run for the exit. When this indicator reaches a level of 30 or less, it’s considered an “oversold” signal.
After either extreme reading, a reversal tends to follow. And that’s exactly what we’re seeing now.
During the recent sell-off, the State Street Consumer Discretionary Select Sector SPDR Fund (XLY) hit an RSI reading of 30.3, then bounced back. Take a look…
XLY’s July sell-off drove the RSI down to its lowest reading since March. As you can see, that March low quickly sparked a major rally. I expect XLY to soar higher after its recent RSI low, too.
Not only that, but consumer discretionary stocks also hit oversold levels based on their bullish percent index (“BPI”)…
The BPI is a breadth measure. It tells us what percentage of stocks in a sector are participating in an uptrend.
Readings above 50 are generally bullish… But a BPI of 70 or higher triggers an overbought reading. On the other hand, a reading of 30 or less means a sector is oversold.
With its recent decline, XLY reached oversold levels. On July 24, consumer discretionary stocks dipped to a BPI below 30. Take a look…
This is a classic oversold signal… And as you can see, it pointed to a turnaround for the fund.
After oversold signals from both the RSI and BPI, it’s a good time to be bullish on consumer discretionary stocks.
The correction in this sector offers a great opportunity to go long… But the window won’t stay open forever.
Good investing,
Chris Igou
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