Relative Strength: Consumer Discretionary and Financials

Not many people will argue with the fact that the bear market of 2007 to 2009 was a result of the bill coming due for overleveraged consumers and financial institutions.  Both sectors were two of the poorest performers during the period and dragged the overall market lower.  When equities bottomed in March 2009, these two sectors were also the strongest performers during the initial stages of the rally.

As the early momentum of the rally has worn off, however, these sectors have gone their separate ways.  The chart below compares the relative strength of the Consumer Discretionary and Financial sectors versus the S&P 500 over the last year.  When either of the lines are rising it indicates that the sector is outperforming the S&P 500, while a declining line indicates underperformance.  As shown, since the market lows in late June, Consumer Discretionary stocks have reversed and led the market higher and are now near their highest levels of outperformance versus the market in the last year.  Financials, on the other hand, have gone nowhere but down and are now at their lowest levels in terms of relative strength in the last year.

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