Betting on the Consumer

05/29/2014 10:20 am EST


Thomas Aspray

, Professional Trader & Analyst

Warmer weather should provide a bigger lift to consumer spending as we swing into summer, so MoneyShow’s Tom Aspray goes prospecting for opportunities in consumer-sensitive stocks.

The Dow Jones Transports led the market higher as most of the other major averages recorded slight losses. The Dow Jones Utilities and the homebuilding stocks were also a bit higher. The A/D ratios were positive on the NYSE Composite but negative on the Nasdaq Composite.

Many still question the strength of the economic recovery and today’s preliminary reading on 1st quarter GDP could support their skepticism. It has been my view since February that the economic data would continue to improve and that the consumer would return as we move into the spring and summer months.

There has been some notable improvement but the next month or two will be critical, as in addition to further improvement in the outlook for housing, we need to see an increase in consumer spending.

The Select SPDR Consumer Discretionary (XLY) has rallied this week and now appears to have bottomed but needs further strength to confirm a significant low. It was recommended in early May. I have also found two other consumer stocks that are acting well, and one of my earlier consumer-sensitive picks is starting to trend higher.

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Chart Analysis: The Select SPDR Consumer Discretionary (XLY) hit a low on May 15 of $62.63 and has rallied 4.3% from this low.

  • The quarterly pivot at $64.40 has been overcome and this could be the first weekly close above this pivot in the 2nd quarter.
  • For June, there is monthly projected pivot resistance at $66.37 with the weekly starc+ band at $67.57 and the yearly high at $67.64.
  • The quarterly projected pivot resistance is at $71.20.
  • There is short-term support now at $64.31 and the rising 20-day EMA.
  • There is more important daily chart support, line a, in the $63 area.
  • The daily relative performance is trying to bottom out but it will take another week or so to confirm.
  • The daily on-balance volume (OBV) moved above its WMA in April but has major resistance at line c.
  • The weekly OBV (not shown) is rising and close to moving back above its WMA.

Expedia, Inc. (EXPE) hit a high of $81.45 in February and dropped to a low of $66.79 in early May. This was a decline of $18%.

  • The decline violated the 38.2% Fibonacci support from the August 2013 lows.
  • The correction has held above the 50% support at $63.34.
  • EXPE is trying to hold above the quarterly pivot at $72.10 with the 20-day EMA at $71.20.
  • The close, Tuesday, above the daily downtrend, line d, is a positive sign.
  • The flag formation now appears to have been completed.
  • The downtrend in the relative performance, line d, has been broken.
  • The RS line had dropped back to the February lows, line f.
  • The OBV has moved above its WMA but is still below the early May highs, line g.
  • The weekly OBV (not shown) has moved back above its WMA.

NEXT PAGE: 2 More Attractive Consumer-Sensitive Stocks


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Lennar Corp. (LEN) was one of my favorite homebuilder picks last fall as our longs were stopped out in March for a 22.5% profit.

  • LEN has rallied back to its daily starc+ band this week and has reached May’s monthly projected pivot resistance.
  • For June, this resistance level is at $41.87 with the mid-March high at $42.72.
  • The weekly starc+ band is at $44.17 with the quarterly projected pivot at $48.11.
  • The daily relative performance has moved above its downtrend, line b, and the prior highs.
  • The RS line has good long-term support at line c.
  • The daily OBV need stronger volume to complete its bottom formation and any pullback over the near term should be on lower volume.
  • The quarterly pivot is at $40.09 with the rising 20-day EMA at $39.19.

Leggett & Platt (LEG) is a $4.68 billion dollar home furnishing company that was recommend just before Christmas and the order was filled in January (see arrow).

  • The stock is trading just below the May highs at $34.06 with June’s projected pivot resistance at $35.23.
  • For next month, the pivot is at $33.33 with further support at $31.54.
  • The weekly starc- band is at $30.63.
  • Below the bar chart, I have included the 14-period weekly Average Directional Movement Index (ADX), which was developed by Welles Wilder.
  • It is the focus of this week’s trading lesson (sign up here to receive a copy).
  • The downtrend in the ADX (line f) derived from two distinct highs is now being broken.
  • The ADX line has also now moved back above its WMA, which is consistent with a trending market.
  • The RS and OBV analysis are both positive.

What It Means: The Select SPDR Consumer Discretionary (XLY) has been lagging the Spyder Trust (SPY) all year as it is down 1.9% YTD versus a 4.1% gain in the SPY.

Therefore, the consumer stocks may emerge as a leading sector as we move into the summer months. Both Expedia, Inc. (EXPE) and Lennar Corp. (LEN) look attractive on a slight pullback.

How to Profit: For Expedia, Inc. (EXPE), go 50% long at $72.41 and 50% at $71.44, with a stop at $68.96 (risk of 4.1%).

For Lennar Corp. (LEN), go 50% long at $39.78 and 50% at $39.30 with a stop at $37.46 (risk of 5%).

Portfolio Update: Should be 100% long the Select SPDR Consumer Discretionary (XLY) at $63.92, raise the stop at $62.16. Should also be long Leggett & Platt (LEG) from $29.99 with a stop at $31.28.

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