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Consumer Discretionary Sector Trading Strategy

Modified date: April 18, 2023

If the economy is bad and you aren’t making excess money, you probably won’t fancy dining in a luxury restaurant or buying luxury goods. These discretionary consumer products or services are not necessary for survival, and their demand depends on economic conditions and the wealth of individuals. Let’s take a look at the sector.

Table of contents:

What is the S&P Consumer Discretionary sector?

The S&P 500 Consumer Discretionary consists of those companies included in the S&P 500 that are classified as members of the GICS Consumer Discretionary sector — a sector that covers goods and services for which the demand depends upon consumers’ financial status.

The companies in this sector sell higher-priced items, such as automobiles, luxury goods, and leisure products. So, you will find hotel and restaurant stocks in this sector, along with car manufacturers, and e-commerce-based retail companies.

The ETFs that track this sector include Vanguard Consumer Discretionary ETF (VCR) and Consumer Discretionary Select Sector SPDR Fund (XLY).

What are the 5 biggest stocks in the sector?

The top 5 stocks in this sector include:

Amazon.com, Inc. (AMZN): The e-commerce giant engages in the retail sale of consumer products and subscription services across the globe and also offers Amazon Web Services (AWS) — a cloud computing service that rents servers to businesses. Its retail service sells merchandise and content purchased for resale from third-party sellers through physical and online stores. But it also manufactures and sells electronic devices, including Kindle, Fire tablets, Fire TVs, Rings, Echo, and other devices, as well as provides book publishing and media streaming services. As of July 20, 2022, its market cap is $1.22 trillion.
Tesla, Inc. (TSLA): The company designs, develops, manufactures, leases, and sells electric vehicles in the United States, China, and internationally. It also engages in the generation and storage of renewable energy. It has two segments: The Automotive segment offers electric vehicles, provides a network of Tesla Superchargers, and in-app upgrades, and sells automotive regulatory credits. The Energy Generation and Storage segment engages in the design, manufacture, installation, sale, and leasing of solar energy generation and energy storage products, to residential, commercial, and industrial customers. Tesla stock has a market cap of $773.966 billion as of July 20, 2022.
The Home Depot, Inc. (HD): The company sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products. It also offers installation services for flooring, cabinets and cabinet makeovers, countertops, furnaces and central air systems, and windows. In addition, it provides tool and equipment rental services. Its market cap as of July 2020 is $308.285 billion.
McDonald’s Corporation (MCD): The company operates and franchises McDonald’s restaurants in the United States and many other countries around the world. Its restaurants offer all sorts of treats. Founded in 1940, the company operated 40,031 restaurants as of December 31, 2021. As of July 20, 2022, the stock has a market cap of $188.677 billion.
NIKE, Inc. (NKE): The company, together with its subsidiaries, designs, develops and sells athletic footwear, apparel, equipment, and accessories around the world. Its NIKE brand products are in six categories, including running, NIKE basketball, the Jordan brand, football, training, and sportswear. The company also markets products designed for kids, as well as for other athletic and recreational uses. Its market cap as of July 2020 is $175.263 billion.

Consumer Discretionary ETF

The ETF with the ticker code XLY tracks this sector. We have not covered this ETF before, but we have covered its “cousin”:

XLP trading strategies

In the rest of the article, we’ll be looking at XLP, albeit XLY might perform slightly differently.

Consumer Discretionary trading strategy (XLY strategy)

The consumer discretionary sector is a slightly underrated trading vehicle. We have been trading both stocks and the relevant ETF with the ticker code XLP. This sector is one of the few that works pretty well on the short side. If you’re a short-term trader, you’d be pretty interested in having short strategies in your portfolio of trading strategies!

Consumer Discretionary trading strategy 1

As an example of a trading strategy, we show you the equity curve of our monthly trading edge in May 2021:

The backtest was done on XLP.

Trading strategy metrics:

No. of trades: 416
Average gain per trade: 0.46%
Win ratio: 73%
Profit factor: 2.2
CAGR: 9.1% (assuming no leverage)
Exposure/time in the market: 32%
Max. drawdown: -15%

Consumer Discretionary trading strategy 2

Our second strategy is our monthly trading edge in April 2021:

Performance metrics (XLP):

No. of trades: 141
Average gain per trade: 0.74% (1.26% for winners and -1.8% for losers)
Win ratio: 83%
Profit factor: 3.48
CAGR: 5.1%
Exposure/time in the market: 10%
Max. drawdown: -10%

Other sector trading strategies

We have covered all the different subsectors in the S&P 500:

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