Confidence Ratio Going Down

A great indicator to determine the confidence (ie. risk appetite) of investors/speculators is the XLY/XLP ratio. XLY is the ETF for consumer discretionary stocks whereas XLP is the ETF for constumer staples stocks. In times of confidence, XLY should perform better than XLP because there is belief that the economy is doing well and that people will spend cash on things that are not absolutely necessary.

The ratio has been tracking US equities indexes fairly well over the last years, but now we see major divergence. XLY/XLP is moving down and from a technical analysis standpoint it does not look like it is about to go rise back anytime soon.

Yet, at the same time, the S&P 500 has been hitting all-time highs. This performance seems like it is not supported by risk appetite - which it should!

So what should you do from here? Short this ratio? Short the S&P? That is all up to you. This is just another factor from a long list that supports the thesis that equities are overextended.

Good luck trading.

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