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 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.