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Consumer Discretionary Sector - How it works

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Hopefully, as a Trader - you will be vaguely aware of Sectors within the Stock Market and hopefully within your understanding of these sectors, you'll have a rough understanding of when is a good spot to enter into a position and when is a decent shout for standing aside... if you don't have an understanding of sectors... then read on... you may just pick up something new - because this weeks blog is going to focus on Consumer Discretionary (I've chose to start off my Sectors series for no other reason, other than it is Trending at the moment (June 2018).

Sooooooo. What is Consumer Discretionary? Simply put... it's a sector that can be viewed as "luxury spending" by the average consumer... they are non-essential items that consumers have the "discretion" to purchase... and the best example I can give to drive home the point - if you have $2000 spare each month within your household, and you choose to go and buy an Apple iphone... this would be considered Consumer Discretionary spending and therefore by purchasing products from these type of companies - you are contributing to the Consumer Discretionary Index.

We're talking about Electrical products... Fashion brands.... Entertainment... Cars.... if you spend money on it, and it's considered a "luxury" - you can class is as Consumer Discretionary.

The blog isn't going to deep dive into the Economics of this Sector, or get into subjects such as Consumer Confidence or Disposable Income etc and how this can affect the sector... you all know by now that I prefer to let price tell me what the news is saying.

In saying that, I'd like to just cast back to history a second and give a brief snapshot of how the sector historically performs... during "boom" periods... the Consumer Discretionary Sector tends to outperform the Market, and when times are a bit tougher.... it tends to under-perform - this in of itself isn't too difficult to understand... if a family has more money - they spend more money... if times are tough - luxury spending is cast aside in favor of the absolute bare necessities. This is about as much as I'd like to get on in regards Economics... but here's a few things you should really need to know and a few of the positives and negatives that relate to the sector.

Positive Factors - 

Improving Job Market - more jobs... more money... more spending and if we add in Tax Cuts as well as Wage growth - it's not too difficult to understand that we really just need to pay attention to the basics of economics in order to gain a birds eye perspective on the Consumer Discretionary Index.

Negative Factors - 

Low Interest Rates help (FED rate hikes DO NOT)... as do Low Oil/Gas prices (I hope common sense dictates why this is the case)... Trade disputes aren't great either given it tends to push prices of things up

Bloomberg paint a good picture when looking at the Consumer Discretionary sector - you can find out what they analyze HERE

I'd also like to share a chart with you, and it should really give you an idea of how a sector performs AFTER something like the Recession we seen in 2007/2008 - it should really drive home the point of how this sector performs in "BOOM" periods and when Consumer confidence enters back into the fray. 

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Stocks within this sector that I'm sure you've heard of - Apple / Amazon / Nike etc are all considered Consumer Discretionary and it will likely be no real surprise that these stocks have blasted off like a rocket ship in the last few years... but if we look closely at this area... there are always new opportunities to get in "early" on potential juggernauts that have the potential to move from (let's use the example $10 to $100 in the space of a couple of years - this would be a phenomenal return and we only need to look at the example of Canada Goose recently (which I highlighted on Social Media 8 months ago at $25 and which now trades at $60)

Consumer Discretionary is considered a little higher risk.. for no other reason than the performance of the stock is very much dependent on Consumer spending and the notion things move in and out of fashion very quickly.

A recent example of just how much the stock can move when something goes out of fashion... look no further than Under Armour (UAA)... once upon a time it was the latest hot sports apparel company... it fell out of fashion... the stock fell off a cliff... dropped from $50 to $10 (80% drop) before they got back IN fashion - they sponsored THE ROCK.... yup.... THE ROCK... possibly the biggest star on the planet... and his Instagram feed is littered with Under Armour workouts... all of a sudden - we see a jump from $10 to $20 in the space of a year.

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The point I'm trying to make - Consumer Discretionary is littered with the trusted brands... but if you're looking for VALUE and not just looking to collect dividends from the Dinosaurs - then keep an eye on what's the latest new trend and what's offering value because I can assure you... once The Rock started his sponsorship agreement - Value was being offered... and the stock was duly snapped up.

In my opinion, it pays to combine Technical Analysis with a Value mindset within Consumer Discretionary, I'm not saying you need to have an understanding of Balance Sheets in order to take the trade, because quite frankly... price pays... If price is going up and the company fundamentals aren't sound - I don't particularly care... I'm a Technical trader - but having an eye on the latest trends definitely pays. 

Further to this, and as a Technical based Trader. it certainly helps to understand the sector within which you are looking to place an entry... for example... for me... the ideal scenario is (but certainly not the only scenario)... you find a stock that's trending, coupled with a trending sector... and a clear entry point for the stock - generally - you'll have the required combination for a high probability environment for continuation and this is just 1 of the many reasons why I have such a high success rate with entries into the market.

Obviously once an entry is taken - price will do what it likes - all we can do is manage the trade and limit downside at the earliest possible opportunity. 

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Sam McCallumComment