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.