The Consumer Discretionary SPDR ETF (XLY) made an all-time high of 77.89 toward the end of April, and has more or less traded sideways in the past three months – closing Monday at 76.52. This ETF is an important one for investors to watch as it comprises of some major consumer stocks like Disney (DIS) and Amazon (AMZN).
Two weeks ago when the S&P 500 Index made a push higher in what looked like a breakout at the time, XLY never followed suit.
In fact, the Consumer Discretionary ETF lost its October 2014 trendline a month ago, much earlier than the S&P 500 did. The ETF is finding resistance at the underside of that broken trendline. On a monthly chart, the past three months have produced dojis. One can even argue that on a daily chart there is a rounding top in the making (Chart 1).
It is looking vulnerable at least near term. Last Friday, XLY found support at its 50-day moving average (76.18). Odds favor it loses that. There are some early signs of market participants preferring risk-off at the moment. Demand for VIX (Volatility Index) calls in June and July expirations – former in particular – has shot up; and of late in the futures market, June has seen a faster rise in price.
Depending on what comes out of Greece this week as well as how markets react to various other U.S. data points – most importantly the May jobs report (Friday) – the ETF could go either way… either push up toward its highs or down through the 50-day moving average. If the first scenario comes to pass, this likely will be used as an opportunity to lighten up on consumer stocks and XLY. Offensive momentum is stagnant currently. The ratio of XLY to XLP, the Consumer Staples SPDR ETF, has gone sideways to slightly down for the past two and a half months (se chart above)).
Weekly XLY June 5th 76.50 calls are selling for $0.47. Writing naked calls can be risky, so in the event the ETF rallies this week, a short call effectively ensures a short position at 76.97. The way the ETF has been acting there probably is not much upside risk at the moment. If it goes sideways to down, it is a nice premium to keep.
A potential risk is short interest. In the wake of the mid-October 2014 bottom in U.S. stocks, XLY shorts got squeezed (black arrow in Chart 3). Short interest declined until mid-December, and has been gradually rising since. Over the past year, the mid-May count of 43.3 million is the second highest after end-July. So in the event risk-on comes roaring back and the ETF starts attracting bids, there is still room for a squeeze.
At the same time, short interest is a tricky thing – and difficult to get a handle on. In February, the Consumer Discretionary ETF rallied 8.5 percent. During the period, short interest jumped 19 percent. These shorts are not buying it – the rally, that is. The ETF has gone sideways since March, as has short interest.
Odds still favor that the shorts of this consumer stocks ETF will have the last laugh.
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No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
