Consumer Strength Signal Flashing Short-Term Caution Sign

Core Insights - The Consumer Discretionary Select Sector SPDR Fund (XLY) is outperforming the Consumer Staples Select Sector SPDR Fund (XLP), indicating strong consumer spending power after basic needs are met [1][2] - The XLY's relative strength has reached above 1.20, the highest since the beginning of the year, suggesting healthy consumer strength [2] - Historical data shows that when the XLY/XLP relative strength exceeds 1.20, it has led to varying stock performance, with short-term returns generally being negative but longer-term returns showing more promise [4][5] Consumer Discretionary vs. Consumer Staples - The XLY includes major holdings like Amazon, Tesla, Home Depot, and Booking Holdings, which thrive on discretionary spending [1] - The XLP consists of essential goods providers such as Walmart, Costco, Procter & Gamble, and Coca-Cola, focusing on necessities [1] - The performance of XLY stocks has been better than XLP stocks following signals of relative strength [10] Historical Performance Analysis - In the short term, the S&P 500 averaged a loss of 0.82% over the next month after XLY/XLP signals, with only 33% of returns positive [5] - Over three months, the S&P 500 gained an average of 0.44%, with 44% of returns positive, compared to a typical return of 1.82% [5] - Longer-term returns (6-month and 12-month) show average returns of 3.52% and 10.82% respectively, indicating a more favorable outlook [5] Individual Signal Performance - The last five signals have resulted in positive S&P 500 returns every time over the next year, with a minimum return of 11.8% and an average of 26% [7] - Historical data from 1999 shows that the average returns for the XLY after signals are generally higher than those for the XLP [10] Returns After Signals - XLY returns after signals show an average of 0.66% for 1-month, 0.41% for 3-month, 4.15% for 6-month, and 15.42% for 12-month periods [11] - XLP returns after signals indicate an average of -0.48% for 1-month, -1.39% for 3-month, 2.16% for 6-month, and 8.95% for 12-month periods [12]