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Doubling Down on the Consumer


Think Americans are ready to spend again? Here's how to play it.

Since the market's most recent closing low on February 8, where have investors been putting their money to work in the stock market?

The team at Bespoke Investment Group offers some guidance. This morning, the crew there posted a chart showing where stock pickers are committing capital.

According to their analysis, commodity-related stocks have seen the greatest strength as Energy and Materials are the top two performing sectors, while the more defensive sectors, like Utilities, have lagged.

Check out the chart for yourself here.

Interestingly, according to Bespoke, another sector that has enjoyed a nice-sized gain is Consumer Discretionary, which is up 7.3%.

Indeed, in his morning missive today, Jon Markman of Markman Capital Insight touches specifically on this theme, writing to clients that investors look like they're now betting heavily on the robust return of the American consumer.

Markman elaborates: The Consumer iShares (IYC) ETF is rapidly closing on its January high and it's accelerating at a much faster pace than any other sector fund.

The market pro also emphasizes that Heinz (HNZ) was joined by fellow consumer stocks such as ConAgra (CAG), Costco (COST), Tyson (TSN), Mattel (MAT), and Sara Lee (SLE) in its push to new highs.

"Home Depot (HD) even hammered out a new high today, which was a shocker," Markman wrote.

For additional perspective on the Consumer Discretionary space, we checked in this morning for a brief chat with Sam Stovall, Chief Investment Strategist at S&P Equity Research.

Stovall reminds us that Consumer Discretionary is actually the second best performing sector since the March 9, 2009 low, after Financials, up 90% versus 60% for the S&P 500.

As for the recent moves in the sector, Stovall points out that from the January 19 high to the February 8 low, the higher beta areas like Consumer Discretionary got whacked.

"The higher volatility groups get hit on the way down but do well on the way up," the strategist. "So what we're seeing now reflects volatility combined with the underestimation of US consumer's willingness to spend."

Stovall, for his part, however, still remains lukewarm on the sector, rating it Market Weight, for now.

"Our analysts have been very cautious about the consumer given their conversations with management and economic projections," he says.

Part of the additional reason for some caution, Stovall says, is that the sector isn't looking like a bargain here, noting that, on a trailing 12-month basis, it now trades at a P/E of 22 versus 19 for the market.

Stovall says Consumer Discretionary historically trades at a 12% premium to the market, but now trades at an 11% premium.

"So it is basically looking fairly valued, in our opinion," he says.

Stovall is instead more bullish on two other sectors: He likes Health Care, which does well as investors start to anticipate a rising interest rate environment, he says, and he's a fan of the Industrials.

"The Industrials are not as expensively priced as other cyclical areas of the market," he tells us. "There will be some good earnings growth in the year ahead. Also, remember that a lot of the infrastructure spending has not kicked in yet."

But, for the traders among us, Markman does offer one way to consider taking advantage of the unexpected strength in consumer stocks.

He proposes buying the SPDR Retail ETF (XRT), a contrarian move, he notes, given how unloved retail is right now.

Markman says to buy the XRT only if it moves up and through $37.15. It currently trades at around $36.41.

"If you want to be more certain then wait for a daily close above $37.15," Markman says. "If you want to be even more certain then wait for a weekly close. In any case, do not jump the gun on this because the high of $36.75 has held three times in the past five months."
No positions in stocks mentioned.
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