Is XLY In Trouble?

Published on Saturday, 16 June 2012 10:43 Written by Manuel Guerra

It may not be the largest sector ETF on the market, but the Consumer Discretionary Select Sector SPDR (NYSE: XLY) is certainly worthy of its status as a marquee ETF for traders to keep an eye at all times. Home to stocks such as McDonald’s (NYSE: MCD), Walt Disney (NYSE: DIS), Amazon (NASDAQ: AMZN) and Nike (NYSE: NKE), XLY serves as a useful tool for gauging consumer attitudes and sentiment.

Not to mention the breadth of the fund. XLY is also home Home Depot (NYSE: HD), which is a crucial play on residential real estate themes. The fund also counts among its constituent’s high-end retailers such as Coach (NYSE: COH), Ralph Lauren (NYSE: RL) and Tiffany (NYSE: TIF). In other words, XLY does a good job of touching almost every corner of the discretionary universe.

That factor alone makes XLY extremely sensitive to U.S. economic data points, which makes sense since it is the consumer that accounts for two-thirds of U.S. GDP. And it is that sensitivity to economic data that could indicate XLY is vulnerable in the near- to medium-term. Just look at some of the recent U.S. economic data points.

The Commerce Department said retail sales fell 0.2% last month following a revised 0.2% drop in April. Excluding the 2.2% decline in gasoline sales, retail sales increased 0.1% in May. The April/May declines were the first consecutive drops in retail sales in two years. Initial claims for jobless benefits increased by 6,000 to 386,000 last week. Analysts expected a reading of 375,000 new claims. The less volatile four-week moving average rose by 3,500 to 382,000 claims.

On Friday, the University of Michigan-Thomson Reuters consumer-sentiment index slid to an initial June reading of 74.1from 79.3 in May. The initial June reading was the lowest since December and well below the 77.8 economists were expecting.

The New York Federal Reserves Empire Manufacturing Index fell to 2.3 this month, a 15-point drop from May and well below the reading of 13 economists expected.

None of those data points bode well for an ETF that has a lineup like XLY has. In fact, XLY, an ETF that is normally highly correlated to the broader market, is already showing signs it may in for a tumble. During the week ending June 15, the ETF rose less than 0.1%, compared to a gain of three-quarters of a percent for the S&P 500. In the past month, the S&P 500 is up 0.56% compared to a 0.28% drop for XLY.

The aforementioned statistics indicate one thing about XLY: The ETF’s near-term outlook is bleak as long as data points give the U.S. consumer reason to feel pensive. If XLY breaks support at $42, watch out for more downside.