US Stock Sector Forecast – Discretionary Stocks Take a Breather but the Trend is Upward

Consumer discretionary stocks are trending higher, rising approximately  6% in 2021, after notching up robust gains in 2020. The substantial gains are driven by rising demand for discretionary products and low-interest rates. Fed Chair Powell was on the tape on Wednesday, citing bleak jobs picture and saying that the monetary policy will need to stay accommodative. While the technical picture looks positive, the short-term momentum indicator shows that the SIXY is overbought. Positive movements in stocks like Tesla, Amazon and Starbucks are helping to drive the index higher. Seasonally, the returns that the SIXY experiences in February are mixed. Over the last 10-year the index moved higher 80% of the time for an average gain of 2%. During the past 5-years the index was higher 60% of the time but the average loss was 1.5%.

Interest Rates Should Remain Accommodative

Federal Reserve Chairman Jerome Powell describes an economy that remains stagnant and focused his comments on the bleak U.S. employment picture. The Fed chair said that aggressive monetary policy support will be needed to fix the myriad issues. His remarks were given in a speech to the New York Economic Club. Even though the economy has reclaimed more than 12 million jobs since the early days of the Covid-19 pandemic, Powell said the U.S. is far from where it needs to be in terms of employment.

Technical Analysis

The SIXY broke out and has eased slightly, retesting support near the 10-day moving average. The next level of support is seen near the 50-day moving average at 1,649.  Short term, resistance is seen near the February highs at 1,752. Short-term momentum has turned negative as the fast stochastic generated a crossover sell signal. The stochastic is a momentum oscillator. The current reading on the fast stochastic is 87, above the overbought trigger level of 80 which could foreshadow a correction. Medium term momentum is about to turn negative as the MACD (moving average convergence divergence) index is poised to generate a crossover sell signal. This occurs as the MACD line (the 12-day moving average minus the 26-day moving average) crosses below the MACD signal line (the 9-day moving average of the MACD line). The MACD histogram looks as it will also generate a crossover sell signal slicing through the zero index line. The trajectory of the MACD histogram is negative.

The Bottom Line

While the trend in the SIXY is higher and lower interest rates and higher demand is likely to lift discretionary stocks, there are likely in for a small pullback. The buying point is the 50-day moving average. With the fast stochastic overbought and generating a crossover sell signal, traders should be leary of buying to early. This is not an index to short because good news from Tesla or Amazon could easily generate buying, which could create lots of stops. Look for the index to continue to trend higher after a brief pause.