Consumer Discretionary’s Muddled Relative Strength

Nov 16, 2022

Ranging from today’s retail sales report to homebuilder sentiment to the earnings of some of the largest retailers like Target (TGT) and Lowe’s (LOW), the economic and earnings calendar this week has given Consumer Discretionary stocks plenty of news to digest. Outside of the spring to late summer, the sector has generally been on the decline relative to the S&P 500 in 2022. Last week, that relative strength line bounced right as it reached the late May low. However, over the past few days, it has been resuming its move lower, meaning it is back to underperforming.

While on a sector level the relative strength line has been falling, drilling down to the industry group level, there has been more variation. For example, even with some positive responses to earnings from the likes of Home Depot (HD) or Lowe’s (LOW), the retailing industry has seen a sharp grind lower in its relative strength line versus the S&P 500.  Similarly, autos have seen a turn lower although it has been underperforming the S&P for a longer period of time since the early fall. Meanwhile, Consumer Durables and Appliances (which includes stocks like the homebuilders and home appliance makers) has been moving higher. That move has paled in comparison to the relative strength of Consumer Services stocks (restaurants, cruise lines, hotels and resorts), though, as that group’s line has surged over the past couple of months.

As mentioned above, retailers in the Consumer Discretionary sector have been underperforming the S&P 500 lately but there is another group of retailers in which performance has been more solid.  The Food & Staples Retail industry is a component of the Consumer Staples sector, and its relative strength line has been trending higher since the spring lows.  In fact, after the past week’s move higher thanks in part to a strong response to Walmart (WMT) earnings, its relative strength line is approaching some of the highest levels of the past year, entirely recovering the massive drop from May in the wake of another, much more negatively received, WMT earnings report. Click here to learn more about Bespoke’s premium stock market research service.

Homebuilder Hopes Demolished

Nov 16, 2022

The national average on a 30-year fixed rate mortgage has come back below 7%, but it remains elevated versus recent history as housing data still can’t catch a break. This morning, the NAHB released their latest reading on homebuilder sentiment and for the eleventh month in a row, the headline index fell month over month.  As shown below, the current streak of nearly a year straight of declines is far and away a record, surpassing two eight-month long streaks leading up to the Financial Crisis.

This month, homebuilder sentiment dropped another 5 points down to 33. That is not the largest drop of the current streak of declines, with bigger drops of 8 points last month or 12 points in July, but it still ranks in the bottom 4% of all months on record.  In other words, not only is homebuilder sentiment falling consistently, but it’s falling fairly fast. The other components have also seen bottom decile declines with the only sub-index avoiding declines being in the West.

After the November decline, the headline homebuilder sentiment reading sits 3 points above the spring 2020 low. Similarly, Present Sales and Traffic are down to the lowest level since April 2020 while Future Sales have actually surpassed those levels to now sit at the weakest reading in over a decade.

Last month, we highlighted how the geographic breakdown of sentiment was showing homebuilders in the Northeast being much more optimistic than their counter parts in the rest of the country.  In November, that region joined the rest of the pack with a massive 17 point decline.  That ranks as the third largest monthly decline on record behind a 19 point drop in June 2010 and the 45 point decline at the onset of the pandemic in April 2020. While that has not been enough to result in a new low, similar to sentiment in the Midwest, sentiment in the South is down to the lowest level in a decade. The same could be said for the West although it rose marginally month over month.

As for the reaction of homebuilder stocks, the iShares US Home Construction ETF (ITB) is trading 1.1% lower as of this writing.  As shown below, after last week’s equity market surge on CPI in which the group moved not only above its 50-DMA but also its 200-DMA, ITB has continued to hold above its moving averages for now. Without much follow through on the post-CPI surge, any move above last week’s highs would be a welcome bullish sign, whereas the 200-DMA is looking to be the critical level of support for the time being. Click here to learn more about Bespoke’s premium stock market research service.