Time to take notice. After falling for nearly a year, the ratio of the Consumer Discretionary ETF (ARCA:XLY) to the Healthcare ETF (ARCA:XLV) may be bottoming. Healthcare has been a hot trade. Everything from the mega-cap entrenched companies to the biotech startups has been on fire. That's not to say that healthcare's run is over. It may be, then again it may still have legs. But compared to the Consumer Discretionary sector it is about to take a back seat.
The chart above shows the ratio of the two sector index ETFs along with some simple moving averages. Note that the trend has been lower since the ratio broke below the 200-day SMA (green line) and has stayed below the 50-day SMA (purple line) ever since with a couple of brief touches at the 100-day SMA (brick red line) over the summer.
It is still below the 50-day SMA, but since October 23, the ratio has been consolidating in a range, printing a double bottom. And as it is testing the 50-day SMA, the momentum indicators RSI and MACD are diverging from price. They are pointing higher. Watch for a move in the ratio over that 50-day SMA or, more conservatively, over the 100-day SMA to confirm a reversal higher.
Top 5
From there, it is time to start to buy Consumer Discretionary names. The top 5 holdings (about 29%) in the Index ETF are Comcast (NASDAQ:CMCSA), Walt Disney (NYSE:DIS), Home Depot (NYSE:HD), Amazon.com (NASDAQ:AMZN) and McDonald's (NYSE:MCD). Several of these have had a great 2014 and are in uptrends, making it easier to own them.
Also keep a closer eye on the Healthcare names. They may continue to rise, though slower than Discretionary. But if they do reverse, the top 5 holdings in the Healthcare ETF are Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck (NYSE:MRK), Gilead Sciences (NASDAQ:GILD) and Amgen (NASDAQ:AMGN).