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Discretionary Stocks Ready to Rally

David Becker
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www.iforex.com
Discretionary Stocks Ready to Rally

Consumer discretionary stocks are beginning to percolate as a strong season bias that usually favors downside price action, has started. It commonly mentioned that the Consumer Cyclicals Sector (XLY) is a leading indicator. However, Consumer Cyclicals usually pull back in the second quarter of the year so having a weak second quarter in Cyclicals is not unusual. When the rotation back into Cyclicals during the summer months does not hold up the market is usually entering a weaker market or bear market period.

In 6 of the last 12 years the markets saw steep corrections in the broader markets. Almost every year, mid-year lows usually happen in June or July. So after this hard rotation away from cyclical stocks, now is a good time to analyze the market going into June. If they are going to start rising, finding strong stocks and industries after this pullback will be valuable.
Confirmation with the XLY versus $SPX suggests the Cyclicals are turning up against the broader average. It is still early days but establishing a shopping list is important before the big moves. The ratio is beginning to turn higher which should give investors’ confidence that cyclicals are about to turn.

chart-discretionary-stocks-ready-rally.png

Focusing on the Industries within Consumer Cyclicals, shows the Recreational Services Industry, Travel & Tourism as well as Broadcasting and Entertainment round out the top 3 for the last week. The trend for summer vacation industries seems strong here with Recreational Services, Travel & Tourism and Hotels all near the top of the list of stocks that could drive the cyclicals higher. Priceline and Expedia have been huge out performers in the travel space over the years. They recently pulled back on their respective charts. Both are just below resistance. Priceline has bounced off the 200 day moving average and started to outperform the $SPX.

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