New Long-Term Equity Breakout

13-Year Consolidation

We have covered numerous long-term bullish breakouts in the equity markets over the past fourteen months. Last week, the ratio of consumer discretionary stocks (XLY) relative to consumer staples (XLP)  broke above an area of resistance that has been in place for 13 years.  When investors are confident about the economy and markets, they tend to prefer consumer discretionary/cyclical stocks over consumer staples.


Historical Example

Market fractals tell us markets move in similar ways on multiple timeframes (short, intermediate, and long).  After a two-year period of consolidation, the XLY/XLP ratio broke out in 2013, signaling an increasing appetite for economically-sensitive assets.  After we could observe, measure, and record the breakout in 2013, the S&P 500 tacked on an additional 30% (see bottom portion of graph below). 


Chess Masters, Fighter Pilots, And Stocks

This week's stock market video demonstrates how time-tested strategies leveraged by top chess players and fighter pilots can be used to manage risk and reward in the financial markets. 

A Secondary Breakout

Last week's breakout in the XLY/XLP ratio is a secondary piece of evidence in the bull/bear equation that falls into the "interesting" rather than "critical" category.  All things being equal, we prefer to see a healthy XLY/XLP ratio, but viewed in isolation, it is not a reason to alter our investment allocations in any way; that would also be the case if the recent breakout failed.  

Aligns With Bullish Evidence

If we take a weight-of-the-evidence perspective, the XLY/XLP breakout aligns with the mountain of bullish evidence covered in the past 13 months.