Tuesday, May 20, 2008

Three Pivotal Sectors: Financials; Homebuilders; and Consumer Discretionary

Throughout the recent market turmoil, there have been three sectors that I have watched most closely in order to help determine the extent of the challenges the US economy is currently facing and will face in the near future. There should be no surprises here, but for the record, those sectors are financials (XLF), homebuilders (XHB), and consumer discretionary (XLY).

The financials are the foundation of these three sectors and provide a sense of the strength of the institutions involved in credit markets and other related financial businesses. The homebuilders offer some insight into changes in value of existing real estate assets, as well as consumer confidence and willingness to undertake large financial commitments in the coming months. Finally, consumer discretionary firms reflect the size of the pool of disposable income and the level of comfort consumers have in letting go of or holding on to that money.

The chart below shows all three sectors over the past six months. Financials and homebuilders are clearly struggling and have both fallen below their 50 day simple moving averages as of late. The consumer discretionary sector has been the strongest of the three over the past month, but may have peaked last week after getting extended.

Ultimately, my belief is that a healthy economy and a healthy stock market require a strong performance in all three of these pivotal sectors, which is why I call them my 'indicator species' sectors. That may still happen down the road, but at the moment, at least two of the three pivotal sectors are showing a fair amount of weakness.

4 comments:

Tom D said...

Generally I have a positive outlook on things, but as I have been in a sell stocks position as of this past weekend, the negative signals out there are reaching my brain more strongly. lol

Earlier today someone sent me Greg Weldon's latest on the economy. I don't watch CNBC, so I know him only by name. He thinks the economy looks "poorly", as Aunt Nelly always said.

http://weldononline.com/data/wmm052008xMoney1211294816.pdf

Anonymous said...

OT - Bill, what's yoiur take on the huige drop yesterday and then huge jump today in the VXO?

Thanks,

Aristotle

Bill Luby said...

Hi Aristotle,

Check out the comments in yesterday's Inverted VIX: The US Tour (see the comments section)


There was certainly a data error yesterday -- that was corrected later.

Cheers,

-Bill

Anonymous said...

Thanks Bill,

I don't always read the comments so I did not see the dialogue from yesterday.

Aristotle

By the way, I really enjoy your blog, great stuff!

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