Discretionary-to-Staples Ratio Breaks Resistance

The XLY (Consumer Discretionary) to XLP (Consumer Staples) price ratio has formed a double top breakout and violated long-term bearish resistance dating back to November, 2007. (As a reminder, a rising price ratio in this case means that XLY is outperforming XLP.)

Discretionary stocks have been leading staples for some time now, and tend to do so when economic conditions are perceived to be healthy or improving. Violation of long-term chart resistance strongly signals that investors are anticipating such conditions going forward. As long as that sentiment persists, equity prices should remain buoyant.