Last week, and so far this week the stock market has traded rather dismal to be sure, with the S&P 500 trading lower in 8 of the past 9 trading sessions. However, regardless of this weakness, we've begun to see slow, but sure movements beneath the surface that warrant our trading attention. To wit, the S&P Energy sector appears ready to resume its upward trend against the S&P Consumer Discretionary sector. In other words, Energy is expected to outperform Consumer Discretionary. As for our chart target: we could very well see the ratio trade upwards of 2.3 to 2.4 in the months ahead.
From a technical point of view, let's note that prices have consolidated in bullish fashion since January-2011, and have done so with prices faltering from the longer-term 130-week moving average and back into the more medium-term 40-week moving average. Moreover, this bullish consolidation implies higher prices ahead towards the 2.3 to 2.4 level beneath trendline resistance, especially given the ratio continues to hold at the 40-week moving average. But the gains could be even more material given prices will have broken out above the larger 130-week moving average, solidifying the trend higher for months and perhaps years ahead. Lastly, the 20-week stochastic has turned higher in bullish fashion through its trigger point; confirming momentum is rising.
Therefore, given the developing evidence: we believe being equal buyers of energy stocks and equal short sellers of consumer discretionary shares makes sense...regardless of market direction. The beauty lies in the relative trade.