This is a chart of the Consumer Discretionary Sector Index Fund relative to the Consumer Staples Fund $XLY vs $XLP. We are now breaking out to new all-time highs, which is evidence of risk appetite for stocks, not risk aversion:

Look back to the highs in 2007 for the S&P500. Notice how the Discretionary/Staples ratio had already peaked and was putting in lower highs while S&Ps were still making higher highs. This bearish divergence was evidence of a shift in positioning from the long only community. It was a heads up, among many other things at that time, that something was changing.

Fast forward to early 2009 and the Discretionary/Staples ratio was putting in a higher low while S&Ps were still making lower lows. Although the index itself, or the “stock market”, was still in a downtrend, the “market of stocks”, was already improving. We were seeing money flowing into Discretionaries and out of Staples, indicating that the long-only PMs were already putting money to work to take advantage of higher stock market prices. The rotation was clear.

I have been in the camp that stocks are going higher and we want to be buyers. This chart above is further confirmation that we are on the right track. I see a lot more good than bad out there, and we can chalk up new highs in the XLY/XLP ratio as another feather in the hat for the bulls.

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