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Consumer Discretionary: The Least Crowded Trade?


Costco and the rise of the consumer dead.

I shared my opinion last Friday that when a 78-year old lifelong CD buyer wants to open an account with a grains broker the same day that many front pages on newspapers carry the story about Costco (COST) rationing rice, that you use sell disciplines for a reason. Namely, those.

I rolled up stops for many positions surrounding our "Food Fight" secular work. It's far, far from over. It just gets a little more crowded when the rioters quite literally join your trade, exactly as I predicted and shared when writing we'd have more violence over food shortages than energy. I then wrote last year that by this summer "the topic of dinner time conversation will turn to the cost of dinner." Spring beat us to it on that call.

In case you are not in the habit of pulling up a chart of Rough Rice futures, here it is.

Click to enlarge

In related news, my daughter is in the middle of "economics" week at kindergarten and is bringing food in to host a mock grocery store before donating it all to a local shelter. Looking inside her bag I noticed boxes of rice. For the record, I only thought briefly about teaching her a bid/ask lesson by putting them up for auction on the Korean eBay (EBAY)-like Gmarket (GMKT). I opted instead to go with the lesson plan and ask about any shortages or panics at the Costco she bought them at. "Nope, I got a special 10 for $10," she said. Hoarding for a cause – that's my girl. And business as usual for Costco, whose shares I bought in a sector trading call that I've been building a shopping list for.

Consumer: Un-Confident and Un-Crowded

Maybe that trip to the store holds another bag of possibilities. Don't look now, but shares of COST are ticking through its all-time closing high today. While the front pages were screaming about the consumer's most recent of many burials covered by rising commodity prices, could just the opposite be brewing for a trade? With the Consumer Confidence number hitting a 26-year low, I'm interested.

With everybody arguing about Fed tightening or easing, I wondered about the pause instead. As always, my friends at Bespoke answered the bell. Since 1958, we looked at the periods of time between easing and tightening. We have an average of 329 days per "pause" to work with here. The top three performing sectors were Energy, Technology, and Consumer Discretion for an average gain of +20.7%.

Then we used an additional lens through the eyes of the US dollar. The greenback's bear market, beginning in 2001, is the longest since 1967. If we are on the doorstep of a dollar rally it might be worth knocking on the data showing the best performing three sectors on that turn: Financials, Consumer Discretion, and Technology. Using the last four dollar rallies, those three averaged +126.4%. Each of those were multi-year dollar rallies, so keep that in mind, because we may fall well short of that here but it's another clue. The three worst were Materials, Utilities, and Telecom.

I would scratch three of the four out-performers off my list of un-crowded trades with unusual rally potential. Financials are still well above their average weighting in the S&P 500 over the past two decades. Energy is about as un-crowded as Boone Pickens' suite for OSU games. And Technology is increasingly a weaker dollar bet for the very best among them selling in dozens of new markets since that data was collected. So, we're left with the most uncomfortable trade I've made in a while: Consumer Discretion.

A Few More Clues in My Un-Treasure Hunt

If Crude falls: I looked at 21 bulls and 21 bears since 1986 defined by + or – 20% moves on barrel of oil. The best performing sector was Consumer Discretion for an average of +10.7%, and the sector was up 18 out 21 times.

Barron's "Big Money Poll" showed Consumer Discretion was the sector that overwhelmingly was viewed to be the worst. Yet surprisingly, they are equally convinced of the dollar rally and falling energy prices. If only they all read Minyanville, they'd see the contradiction according to this data you now have.

Not surprisingly, the sector with the heaviest short interest as a percentage of float is Consumer Discretion. This sentiment and positioning explains why the sector with the biggest average up moves on EPS beats this quarter is Consumer Discretion, and it's not even close at +1.95%, a full 100 basis points over any other sector.

I am no more bullish of the domestic economy than my growling bearish friends. I have written extensively about the "Complacency" that I continue to position against for the long-term. My core positions are still filtered heavily against domestic trappings. But I don't have to like the economy to like the stocks for a trade.

"Easy Money?"

Big Jack, my 4 year-old, and I went for a #1.5 clipper job yesterday. "Easy money," the barber always says as we stroll in, the same guy, that when I had a lot more hair started cutting it 24 years ago. I felt something was different as we waited. Sure enough, he told me after an elder customer got stuck to the duct tape holding his chairs together last week he finally decided to buy new ones. It was the first such discretionary purchase in a long time. He had those original chairs for 38 years. He doesn't take credit cards, and business is just fine.

Hmmm…If so, I wonder if there wasn't another lid placed above the rally in bonds. Notice this other trend-breaking food for thought.

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Position in COST.
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