Last week, the May retail sales report came out and was much stronger than expected. Sales were up 0.8% versus expectations of 0.4%. Guess which sector benefitted the most?

It’s the consumer discretionary sector — and the billionaires are all over it.

Last month, we showed you that the billionaires moved heavily into discretionary stocks during the first quarter of 2018. They increased their holdings of these stocks by more than 20% during the quarter.

The billionaires use fundamental analysis to determine which stocks they want to buy. Each one uses something different, but they’re all looking for an advantage. And the large consumer discretionary stocks have huge advantages.

The discretionary stocks have four advantage factors that are driving their stock prices higher.

Big Names

The big names include world-wide recognized brands such as Amazon, Disney, McDonald’s, Nike, Netflix, and Starbucks.

Big Gains

Discretionary stocks have seen large percentage gains this year, and the charts are trending higher. Amazon is at or near all-time highs. Apple is at or near all-time highs. Netflix is at or near all-time highs. Nike is at or near all-time highs. And so on.

Big Strength

The third factor, big strength, means financial strength. Most of these big discretionary names have rock-solid balance sheets and mountains of cash. Apple is sitting on a larger cash pile than most small foreign countries. Even Amazon, which was long criticized for its lack of profits, is now gushing cash.

Big Moats

Then there’s the big moats factor. The “moat” is probably Warren Buffett’s favorite concept. It represents a built-in edge or competitive advantage that can’t be taken away.

Let’s take a look at the SPDR Select Sector ETF for the consumer discretionary stocks (XLY) …

XLY has been on a huge run-up due to the underlying strength of the economy and consumers. Since the beginning of the year, XLY has more than tripled the return of the S&P 500 (14% vs. 4%).

XLY was less than a dollar away from hitting its Stock State Indicator (SSI) Stop signal in early April, but it came roaring back with almost all of the yearly gains coming in the last two months.

Examining the SSI condition of the top 10 stocks shows that five are in the SSI Green Zone and five are in the SSI Red Zone. The top three holdings in the ETF — Amazon (AMZN), Home Depot (HD), and Netflix (NFLX) — are all in the Green Zone.


These top 10 holdings account for 60% of the sector. With AMZN itself holding 22% of the index. It’s hard to believe, but just a few stocks truly can move the entire sector. And that is exactly what’s happening right now with the consumer discretionary sector.

Owning the ETF allows investors to easily own all of the best stocks in the consumer discretionary sector. But you’ll want to keep an eye on the individual stocks themselves to see if more begin to trigger their SSI Stop signals. That could be a signal that the sector has topped and is about to roll over.

The billionaires have done their research and have pushed these stocks higher. We can ride the coattails of their stock-picking acumen as long as the trend will allow — but be sure you have your alerts and your discipline in place.

Have a good weekend,

Richard_Signature

Richard Smith, PhD
CEO & Founder, TradeSmith