When assessing risk appetite and the health of the market, several approaches come to mind. One of my favorites is comparing Consumer Discretionary stocks with their Consumer Staples counterparts.
Discretionary stocks represent products or services consumers spend their "extra" income on—like leisure activities, retail, and other non-essential goods.
In contrast, Staples are those companies whose products and services we continue purchasing regardless of economic conditions. These include essentials like toothpaste, laundry detergent, beer, soda, and cigarettes.
Historically, Staples outperform significantly when markets face pressure, which makes sense given their necessity-driven demand.
How this ratio behaves going forward will provide valuable insights into market participants' risk-seeking behavior as we enter the new year.
For the bulls, a sustained breakout in this ratio would signal risk-seeking behavior, which tends to support higher prices for risk assets.
For the bears, a rejection at current levels could indicate that investors are scaling back risk exposure, which would likely put stocks under pressure.
