Consumer discretionary stocks screamed higher last week, with the State Street Consumer Discretionary Select Sector ETF (XLY) up a monster 6.1%.
So, is the U.S. consumer back?
Or was last week’s considerable action just a dead-cat bounce?
We’ll see what my system has to say about that.
But first, I’d like to share a quick recap of last week’s market action…
Fed Chairman Kevin Warsh opted to keep interest rates unchanged last week, but the bond market had its own ideas…
Reacting to both the nagging threat of inflation and the real possibility of dollar instability owing to out-of-control government spending, bond yields spiked higher. The 30-year Treasury yield hit its highest levels in almost 20 years.
When bond yields go higher, bond prices go lower. And so do the prices of “bond substitutes” like utility stocks and REITs.
That goes a long way to explaining why the State Street Utilities Select Sector ETF (XLU) dropped like a rock last week, falling 4.2%. The second-worst performer was the State Street Real Estate Select Sector ETF (XLRE).
Bond yields have eased slightly since last week’s spike. Could the selloff have given us a buying opportunity in yield-sensitive sectors like utilities and real estate?
Let’s see what my system has to say.
Key Insights:
- Consumer discretionaries staged a major comeback last week.
- Bond yields spiked, pulling down the prices of utilities and other bond substitutes.
- While there was a lot of churn between sectors, the S&P 500 inched higher.
Back from the Dead?
The U.S. consumer has been under relentless assault from higher inflation and, in particular, higher energy prices. Every extra dollar spent on a tank of gas is a dollar not available to spend on Amazon.com or at the mall.
As I do every week, I ran my customary screen of the biggest movers in the sector that were still within 10% of their 52-week highs last week. The idea is to look for solid, market-leading stocks that are getting stronger.
It’s a short list this week, but here’s what I came up with:
Given the brutal run that most consumer stocks have had, it’s not surprising that there aren’t all that many within 10% of their 52-week highs.
And out of the small handful we see, only two rate as “Bullish” on my Green Zone Power Ratings system: Ralph Lauren (RL) and Casey’s General Stores (CASY).
Fashion retailers like Ralph Lauren can be tough to trade because so much hinges on the fickle tastes of shoppers. My system can pick apart the financials, but it’s not going to tell you whether or not next season’s line is a hit with shoppers.
Casey’s is another story. The company operates a chain of gas stations and convenience stores. Demand here tends to be stable and isn’t dependent on the whims of fashion. The shares have been blasting higher over the past year and a half, more than doubling since early 2025.
If you’re looking for a diamond in the rough, my Green Zone Power Ratings system suggests starting with Casey’s.
Income Bargains?
As I mentioned earlier, the carnage in the utilities sector is mostly a yield story.
This makes sense. Dividend stocks compete with bonds for the same pool of income-hungry investors. So, if bond yields rise, dividend yields have to rise too in order to stay competitive.
Now that yields are a little juicier following the selloff, are there any potential steals in the utility sector?
Let’s see what the system says…
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
Unfortunately, there’s not a lot of green here.
Most of the utilities on the list rate as “Bearish” on my Green Zone Power Ratings system. But Edison International (EIX) and Pinnacle West Capital Corp (PNW) do indeed rate as “Bullish.” At current prices, Edison sports a dividend yield of 4.8%, while Pinnacle yields 3.6%.
Those aren’t monster yields, of course. But Edison’s in particular is competitive with long-term bonds while also offering the potential for growth in the dividend stream over time.
To good profits,
To good profits,
Adam O’Dell
Editor, What My System Says Today
