I’m set to attack consumer discretionaries, starting here
With this banking fiasco, we’ve seen the overall market take a turn for the worse.
As you know, I’ve been saying we hadn’t reached out long-term bottom yet, and that all of those rallies we saw were nothing more than flashes in the pan.
Well, there are the four sectors that will usher us into that bottom – and we need to watch them closely for when they turn bearish.
Yesterday we kicked off our four-part series on those sectors by discussing the Industrial Select Sector SPDR Fund (XLI).
Today we’ll focus on none other than the Consumer Discretionary Select Sector SPDR Fund (XLY).
So, the reason we’re looking at XLY today is because it’s sitting on the bubble.
Just look at this table of the top 20 holdings in the XLY – and be sure to note all of the yellow…
Currently comprising 12% of the S&P 500, consumer discretionaries are an important slice of our economy. And these are the top companies that comprise that group, making up roughly 80% of all of the XLY’s coverage.
If you look at the top of the table, four of the top five names on that list are already in bear-market trends – McDonald’s being the lone holdout.
But the thing I want to focus on most is the top two on that list.
Between Amazon.com, Inc. (AMZN) and Tesla Inc (TSLA), we’re looking at a whopping 31% of the entire XLY.
And, for what it’s worth, these have been the two wrenches in our attempts to short the XLY in the past months.
But there are a couple things I’m watching with these two that will tell me when it’s time to, in March Madness parlance, put the full-court press back on.
So, with TSLA, let’s take a gander at the long-term view to get a real sense of whether things are trending bearish or bullish…
When we look at the difference between the 20-month moving average (MA20) and the daily trading level, I’d say it is safe to call that bearish.
Now that the understatement of the century is out of the way, we can narrow our scope a little bit and look at the daily chart…
We’ve got the 50-day moving average (MA50) just below the current trading level, and that’s important.
TSLA is part of what’s been holding the consumer discretionary together on the back of its little bounce early this year.
If we see TSLA break below the $170 level, it is going to put us into a neutral trend when it comes to the MA50.
The algorithms don’t like a break below the MA50 – and neither do the longer-term technical traders.
So, the next couple weeks is going to test that $170 mark, something we’re going to want to watch very closely.
Now, let’s turn our attention to AMZN… 
This one is truly an indicator of so much more than just consumer discretionaries due to the sheer scope of their offerings. It’s a bit similar to transit companies like FedEx and UPS serving as bellwethers for the greater economy.
As you can see, it is playing around with the top Bollinger Band.
For what it’s worth, I’m not going to add to my AMZN short positions until I see it break down below that $100 level.
That’s why $100 is the first price I’m watching on AMZN. But the second one I’m keeping my eyes glued to is $90.
That’s the bottom of that Bollinger Band, and it’s also where we found a bottom last week.
On the downside, I’d be targeting the $85 level, so you’re still looking at 15% bearish downside.
However, if that break of the top Bollinger Band gives us volatility to the upside, and we end up staying above $100, I have to get rid of my short positions and go long with that $108 in sight.
Which brings me to McDonald’s Corporation (MCD).
This stock is in a volatility lockdown right now. No volatility. No trend. It’s been that way since back in December.
Whenever this happens, you look at the events that are going to trade.
We won’t see earnings from MCD until April 27. I’m expecting it to stay quiet until then, but this is going to be a volatility trade that’s going to absolutely blow the stock one way or the other.
I’m 100% going to be cued into this one as part of my XLY analysis to see if I can get a read on that direction.
But we’re not just in wait-and-see mode for the XLY. I’m confident in the signs I’m seeing through all the data and technicals.
If you want to capitalize on this sector turning bearish in the coming weeks, this is how I’m trading it:
buy-to-open the XLY May 19, 2023 140 puts.
And we’re really just getting started. We might be halfway through our four-part series on these market-shifting sectors, but this next one could be the most important of all…
That’s because Monday’s newsletter is going to focus extensively on information technology – which makes up 25% of the entire S&P 500.
I can’t stress enough how much of an advantage being on top of this information will give you in the months ahead.
We’ll win them together.
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March 17 2023
