Consumer Discretionary stocks are a reliable gauge of risk appetite and market health.
Consider these as automobiles, retail, and homebuilding—industries that offer products and services consumers purchase with their discretionary income.
When investors favor these stocks, it indicates a higher level of risk-seeking behavior.
One simple way to assess them is by comparing their performance to the broader market.
The chart below illustrates Large Cap Consumer Discretionary Sector relative to the S&P 500, potentially forming a major 10-year top.
Notice how this ratio has been holding near its lower bounds for quite some time.
If you believe the bull market still has legs, the expectation would be for discretionary stocks to start outperforming.
On the other hand, if you bet this top completes, you expect risk assets to come under pressure.
