Value Flashing a Loud Warning

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Late Cycle Recession Warning in Staples Capitulation

In the last week, we received an  XLY (consumer discretionary)  vs. XLP (consumer staples) warning in our “21 Lehman Systemic Risk Indicators” model (see below).  The recent move is not only unsustainable but also speaks to the increasing probability of recession in the next 12 months.

Over the last two years, value (consumer staples) -4% has underperformed growth (consumer discretionary) +29% by nearly 35%. – over the last year, -10% to +14%.  After last week’s colossal acceleration, the BEATING is now more than two standard deviations outside the thirty-year mean.

XLY vs. XLP Ratio and the S&P 500
Bottom line, the parabolic (see the white line above) outperformance of the consumer discretionary names (ratio of XLY to XLP) has been incredible and is “classic” late cycle activity.  The value depression end is in sight in our view.  Value will crush growth over the next 12-18 months.  A solid leading equity market indicator above, watch for a shift in consumer staples.  The sector typically starts to outperform (after a period of blow off top underperformance) 12-18 months ahead of substantial equity market drawdowns and recessions.

% of Stocks Above the 200 Day Moving Average

S&P Consumer Discretionary: 61%
Brazil: 61%
S&P 500: 54%
DJIA: 53%
Nasdaq: 47%
S&P Materials: 47%
Germany DAX: 37%
S&P Consumer Staples: 31% 

Bloomberg data

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