This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
$1 buys you full access to ALL of TheStreet's Subscription Services! Learn More

Consumer Stock Weakness Is A Troubling Sign

NEW YORK (TheStreet) -- The weather is finally getting warmer and consumer sentiment is improving, or so we were told today with the release of the University of Michigan Sentiment Index. The index moved up to 82.6 from 80 in the prior reading and is now at the highest level this year.

With this improvement, one would expect consumer cyclical stocks to be leading the markets higher but the opposite had been true for much of this year. The consumer cyclicals are currently the worst performing sector in the S&P 500 this year, and by a wide margin, down close to 5% on the year while the S&P 500 is flat (see chart below).



In stark contrast, the defensive utilities sector is the top performing sector this year. In the 2014 Dow Award-winning paper "An Intermarket Approach to Beta Rotation," my colleague Michael A. Gayed and I show why utility stocks in particular are historically a harbinger of higher volatility. We are seeing that first hand this year with utilities strength preceding both the January-February correction and the current pullback.

The combination of consumer cyclical weakness and defensive strength is notable, particularly this late in the cycle. The economic expansion will hit five years this June, and the bull market in stocks is already five years old. That doesn't necessarily mean that it has to end right here but investors should be on the lookout for warning signs as we are likely closer to the end than the beginning.

Looking at a longer-term chart of the consumer discretionary sector relative to the S&P 500 provides some perspective on why persistent weakness in consumer stocks is important for the overall market. After bull market runs from 1995 to 1999 and 2003 to 2006, we saw persistent relative weakness in the sector in 2000 and 2007 (see chart below). This weakness preceded bear markets which saw more than 50% declines in the S&P 500.



Will the weakness in consumer stocks today lead to similar broad market declines, with a bear market commencing within the next year? We don't know. The best we can say is that as long as this weakness is persisting, a more defensive, cautious outlook is warranted. This is particularly true given where we are in the cycle and the fact that it has been almost two years since the S&P 500 suffered a 10% correction.

At the time of publication the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,810.06 +91.06 0.51%
S&P 500 2,063.50 +10.75 0.52%
NASDAQ 4,712.97 +11.1030 0.24%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs