Consumer Discretionary – an opportunity with risk

November 6, 2021No Comments

Hello, and Welcome to the Smart money, Dumb money show. And I am your host as usual Keith Richards, and I’m the President and Chief Portfolio Manager, as well as the chief cook and bottle washer here at ValueTrend Wealth Management. And today we’re going to talk about a sector that is coming to its seasonally favorable period, and that is the consumer discretionary sector. And interestingly enough, the sector popped right at the beginning of November, end of October, beginning of November. And that very much lines up with the traditional seasonal period for the consumer discretionary stocks, which is between November and next May. So, it’s on schedule. Let’s take a look at the chart of the consumer discretionary sector. And then let’s look at some of its components.

This is the XLY consumers, discretionary spider ETF. It’s for the US consumer discretionary stocks. And as you can see, basically not much was happening until just in the past two or three weeks where it popped. Now, why would that be? I mean, you don’t usually get that kind of an explosive move on this or any sector, unless it’s got a stock like this one, which is Tesla. Now, Tesla is known to be a highly volatile stock. Its moves are very often parabolic, so it can move in one direction hard and make 50 or a hundred percent gain in a relatively short period of time and then give half or more of that back in an equal period of time. So, it’s a very volatile stock. And we’ve seen this many times before where it still is, you know, here we saw $400 turned to $800 within a matter of a couple of months.

And then sure enough, you know, much of that disappeared a few months later, we’ve seen this over and over and over again on this stock. So, what I want to know is we’re having another one of those parabolic runs on Tesla. And because Tesla is somewhere near 20% of the consumer discretionary sector, we’re getting a pop on the sector. Now, the question that probably a lot of you are asking is, well, gee, if this is another one of these parabolic moves by Tesla, which as we’ve seen, can be very subject to change. How long would this last? Well, it’s hard to say, but what I can say is these runs on Tesla lasts for a little while, and there may be some more room to go on this stock, but just bearing in mind that you’re playing with fire, this stock trades at something like 350 times earnings, it’s valuated that the same level that if you combined every car company in the world together, Tesla would still be valuated.

Like it’s selling more cars than the entire kit and caboodle combined. Now some say, oh, that’s because Tesla is a technology company and maybe its battery technology is leading-edge, but let’s face it. They’re not that special. And I always wonder what the deal is. And until recently I really didn’t understand Tesla, but one portfolio manager, I can’t remember his name wrote an article somewhere on Seeking Alpha. And he said, Tesla is a meme stock maybe some of you have heard of that term, a meme stock a stock that just people get ahold of and launch it for no better reason than because. Anyways, let’s go on to the second-largest position in the consumer discretionary sector, which is Amazon. And I will disclose that we at ValueTrend have just begun accumulating positions in Amazon. Amazon has traded sideways for the better part of a year.

Actually, more than a year. And I like sideways trading stocks. Actually, the angle of this consolidation has been slightly up, although not by much. Now there’s an expression within the technical analysis that says the greater, the base, the better the case. And you’ll see this over and over, like in this timeframe when Amazon traded very, very flat for the better part of a year when it broke out it broke real hard. So, this is, you’d see this on Google as well. There’s a number of stocks that illustrate sort of platforms and then rallies. And when the rallies happen, they’re strong. We at ValueTrend, we’re starting to buy into Amazon. We do like the stock, but it may take a little while longer before it pops. In the meantime, it is definitely not been one of the driving forces behind the consumer discretionary sector.

Most certainly Tesla has been. So, let’s see what else we have. Well, we have Home Depot. And I think you wouldn’t argue with me when we look at this chart, we can recognize that too has been a driver behind the consumer discretionary sector. And I believe that I’m just going to turn my head here. Yes, Home Depot is actually 8% of the consumer discretionary sector. When you’ve got Tesla and Amazon both sitting at around 20% and then Home Depot at 8%, those are three pretty big positions within the index. We’re talking almost half of this index is made up of three stocks and actually to top it all off the, the fourth largest position is McDonald’s and even McDonald’s is finally showing some life. Now, one of the things that I’m going to just do quickly on McDonald’s, some of you might be aware that I’ve been putting together a course on technical analysis, and I’m comparing consumer in the course and comparing consumer discretionary stocks, just as an example of learning, how to pick the best stocks in the sector.

And I compared McDonald’s to a couple others in the sector. And I want you to just notice, I’m going to just do a quick study here. This is something I pointed out on the McDonald’s chart, and that is that we’re getting some divergence in the momentum indicator. You can see that McDonald’s is falling in its peaks on RSI, stochastics MacD, is most definitely falling, even as it puts in a brand new high and has been moving in an upward direction. So that’s called negative divergence, and we should be very aware of that. So back to the consumer discretionary sector, should we buy it? Should we not? I mean, the evidence is clear. It’s a good sector to be in this time of the year. And it’s also moving right on time. My only hesitation is the drive behind Home Depot and in particular Tesla, it can end ugly for Tesla as we’ve seen in the past.

I do think there’s a little bit more room, perhaps even a lot more room left on Tesla before it runs out of steam. But boy, when it blows, it blows. You really have to be careful. And because it’s 20 to 21% of the index, the discretionary index, you just don’t want to be in that index when Tesla decides to finally blow, because as I said, at least if that one portfolio I was reading is cracking that it’s a meme stock it can be sort of today’s hot item and then dropped like a hot potato tomorrow. You gotta be really careful with this stuff. So, my conclusion would be discretionary stocks are great with a caveat. They’re getting a little bit overbought because of one or two stocks in the sector that could last, but it may not last forever. Buyer beware. Thank you for watching and we will catch you next week with a brand-new video.


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